Investment Update April 2020

Markets in limbo and an economy on hold

Government lockdown measures have brought the global economy to a standstill. Businesses are no longer investing. Household consumption is much lower. The financial markets have also been hit hard: the global equity markets plunged by more than 13% in March.  Given this context, governments and central banks have launched extremely ambitious fiscal and monetary policies. It could be argued that these are the boldest stimulus policies ever seen in peace time.

Were we to summarise these fiscal policies, which we discussed in our previous weekly updates, we would say that governments are seeking first and foremost to prevent bankruptcies and layoffs by helping businesses repay their debts or meet their payrolls. But that’s not all — the US is going even further. The Trump administration plans to send a USD 1,200 cheque to low-income adults, with USD 500 for their children.

US unemployment has skyrocketed, moreover, in just two weeks. In this period of time, 10 million people registered as job-seekers, bringing the unemployment rate to 10%, compared with barely 3.5% just before the crisis. It would therefore be unsurprising if the government once again lent its assistance to households that were already in a precarious position. Several surveys show that about half of households live pay cheque to pay cheque and that the savings rate is barely 7%, far below the level in Western Europe. As healthcare expenses will rise significantly, household disposable income could fall quickly, which will no doubt have an impact on consumption.

 

Economic policies are much more proactive for this crisis than in the past, which makes us optimistic about the recovery, once the public health crisis is over.

Touching again on the actions of central banks, the Fed and the ECB have both launched quantitative easing (QE) programmes, which we have discussed in detail throughout the month. These policies, which are unprecedented in scope (the Fed’s unlimited QE and the ECB’s new EUR 750 billion programme), are aimed at reducing the financial stress that has arisen in recent weeks, in particular on the bond and money markets. Both governments and private companies should therefore have access to low interest rate financing for an extended period, which should make it easier to get the economy off the ground again once the crisis is over.

Lastly, note that the way out of the crisis is to slow the spread of the virus, which has not yet happened in Europe or the US. It is reassuring, however, that governments and central banks are tackling the situation head-on. Economic policies are much more proactive for this crisis than in the past, which makes us optimistic about the recovery, once the public health crisis is over.


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