The IMF’s latest forecast for global GDP growth of 5.8% in 2021 will depend on the effectiveness of government economic stimulus packages.
New Daily Cases of COVID-19
Source: Wordwide; EDIC via Statista 2020. January 1 to April 2, 2020.
As discussed before, we are looking to see a plateau and then a decline in new cases because that would be the indicator that we are gaining control over COVID-19 and a turning point for countries to start to re-energise their economies. The above chart from The European Centre for Disease Prevention and Control1 shows how these numbers have been progressing by region.
Clearly North America has now caught up with Europe in terms of reporting new cases. Both regions are now well beyond the peak seen in Asia, with the United States in particular reporting alarming rates of contagion, now accounting for nearly a third of all cases worldwide. In both regions, the measures taken to control the pandemic were too late and insufficient. The situation in the US is particularly worrisome, given the fragmented state governments’ reaction to the pandemic and the absence of consistency on a national level. We continue to monitor the development of these numbers.
As of April 8th, Europe reported 32,730 new daily cases, North America 32,487 and the Middle East 3,657. South America is showing a significant expansion at 3,085 new cases, while Oceania is reporting a significant decline with 146 new cases. As of April 14th, the rate of growth in new cases in China has risen again to 79 cases that appear to be imported and in South Korea to 25. Taiwan, which has proved extremely effective at dealing with the pandemic has reported a total of 393 cases, with 5 new cases in the last 24 hours. The countries that are perhaps only now grabbing headlines include India, where in spite of suboptimal testing infrastructure reported 1,200 cases on April 14th to bring the country’s total so far to 11,487 and Russia which appears to finally be addressing the problem openly, reporting 3,388 new cases on this day, to 24,490 – this is a big increase. (Country specific numbers for April 14th sourced from Johns Hopkins University2) The UK is only now starting to account for those who did not die in hospitals and the Office of National Statistics (ONS) has announced relevant but two-week old numbers that imply an understatement of the country’s COVID-19 related deaths by around 11%3.
Economic Activity (Kim Catechis, Head of Investment Strategy)
In the midst of a public health crisis, governments, chief medical officers and investors are now trying to identify the right time to start to solve the obvious conundrum – prioritise healthcare security and absorb the economic damage or try to walk a fine line between doing ‘the necessary’ on both. Unfortunately, most governments have lost the initiative mere weeks into this pandemic. It serves no purpose now to try to keep the economy going and the population circulating – it would result in a faster and wider spread of infections, increased absenteeism and lower productivity, not mention increased healthcare, human and economic costs.
In some quarters this does not yet seem to be the consensus view, so the resultant debate slows down response times and adds to the severity and duration of both the pandemic and the recession.
Roberto Azevedo, the Director-General of the World Trade Organisation (WTO), speaking on Friday , forecast a decline in merchandise trade of 13% or of up to 32%, depending on the efficiency and decisiveness of global governments in dealing with COVID-19 and relaunching their economies. To put that into perspective, the global financial crisis of 2008 triggered a 13% decline in world trade. Even with stimulus packages in excess of 5% of global GDP (as mentioned in last week’s edition), that is a mountain to climb.
Big Picture Analysis (Reece Birtles, Martin Currie Australia's Chief Investment Officer)
How the situation progresses in Australia will be very dependent on how the COVID-19 curve flattening pans out, and the implications of social distancing on economic activity.
The Australian Government has provided significant support to businesses and consumers through this difficult time, and Australia looks to be in a much stronger position than many countries around the world.
We are however in a situation that is very unusual, where in order to reduce the transmission of the disease, social distancing has seen activity levels in the economy down something like 70%, and so this creates effectivity a revenue stop for many companies.
But this is an evolving situation. Case numbers in Australia look very much under control with new cases per day at quite limited levels now, and we would expect that there will begin to be less social distancing required, which will allow the economy and businesses to recover over the rest of the year. We might also expect that won’t necessarily be the same in all countries, internationally and international travel is likely to be limited for quite a while. Australia, being a big island, has some advantages in this environment, but the shutdown is having a significant impact on the profitability of companies.
We are not going to stay in this situation forever, and as that situation improves companies are going to recover. We think that it’s likely that the market bottom has already passed at a broad market aggregate level, but there will be significant volatility from different stocks going forward and how they respond to the COVID-19 situation. In that sense we think the worst has most likely passed for equity markets.
Outlook & Investment Strategy
Kim Catechis, Head of Investment Strategy
The IMF has published its April 2020 World Economic Outlook and sets out a base case for the world economy, assuming a -3% GDP for this year and a rebound to +5.8% in 2021. The provisos are that COVID-19 is controlled and the various government economic stimulus packages are effective.
Source: International Monetary Fund. World Economic Outlook April 2020. Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
In the Developed world, there is little variation between countries for 2020. In the Emerging world, the best placed are China (+1.2%) and India (+1.9%). The worst placed countries in Emerging Markets (EM) are Mexico (-6.6%) and South Africa (-5.8%). At this point I’m inclined to see this scenario as a positive one, with a typical ‘V’ recovery in short order, although I’m a little sceptical on India, given that we are still very early in the crisis to tell how government policies play out.
Meanwhile, the energy sector continues to struggle. After a face-off between Saudi Arabia and Russia (both of whom resent US shale oil companies’ free ride on the back of their cuts, Brent dropped to close to $20/barrel, Saudi increased production by 2.5 million barrels per day (mbpd) and offered $6 to $8/barrel discounts for April delivery. Around 60% of US non-investment grade debt payable by 2021 is with shale companies, employing thousands in an election year. Even the big players are hurting, and the banks have been trying to wind in their exposure. April 14th a deal with OPEC+ to reduce production by 9.7mbpd (roughly 10%) starting May 1st caused a short-term bounce in Brent. In fact, the reduction in demand from COVID-19 related demand collapse is estimated by OPEC at 20mbpd. In any case, the agreed production cuts depend on the US shale companies, many with over $60/barrel breakeven, will go out of business, for the OPEC producers to maintain discipline. In the meantime, there are not enough oil storage units to hold the oil that is coming onstream in Q2. And China cannot ride to the rescue this time.
Learn more about Martin Currie’s global equity solutions:
1 Source: Statistia, @ECDC [205-2019] https://www.ecdc.europa.eu/en/publications-data/download-todays-data-geographic-distribution-covid-19-cases-worldwide.
2 copyright 2020 Johns Hopkins University https://coronavirus.jhu.edu/map.html.
3 BBC News https://www.bbc.co.uk/news/uk-52275823.
COVID-19 is the World Health Organization's official designation of the current coronavirus disease.
Developed markets (DM) refers to countries that have sound, well-established economies and are therefore thought to offer safer, more stable investment opportunities than developing markets.
Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.
Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.
The International Monetary Fund (IMF) is an international organization of various member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.
Non-investment grade bonds, also called high yield, or below-investment grade bonds are those with a credit quality rating of BB or below.
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.
OPEC+ includes the 11 OPEC members and 10 non-OPEC nations.
Shale oil is an unconventional oil produced from oil shale rock fragments by pyrolysis, hydrogenation, or thermal dissolution.
The World Trade Organization (WTO) is an intergovernmental organization which regulates international trade.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors and eligible counterparties in EU and EEA countries:
In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4. D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.
In the UK, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the UK Financial Conduct Authority.
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH.
Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China (“PRC”):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia and New Zealand:
This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827). The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.
The aforementioned Legg Mason entities are wholly owned subsidiaries of Franklin Resources, Inc.