By Martin Stefanik, Analyst, Alpha FMC Luxembourg.

The crisis sparked by the arrival of the novel corona virus has been drastic and unexpected, however, its nature should be analyzed before rushed decision are made.

In terms of macroeconomic indicators, the Covid-19 hit the global economy like a wrecking ball that virtually no one was adequately prepared for, with many governments and private companies alike missing the opportunity to act swiftly when first signs of crisis began to appear. It put a quick end to a record-breaking stock market bull run and caused the shutdown of large swaths of economic activity.  

By the end of March, the MSCI World index had lost around a quarter of its value and the S&P 500 plunged more than a third when compared to their most recent peaks. According to the US Labour Department, the cumulative number of people filing initial jobless claims in the USA surpassed 16 million in the last three weeks, smashing any previous comparable numbers on record, with similar scenarios playing out in Europe. France and Germany, Eurozone’s two largest economies, are now officially in recession, with the majority of European countries expected to follow.

National governments were forced to introduce unprecedented measures in order to protect the health of the general population and to combat the inevitable economic and social fallout. Social distancing, lockdowns, curfews, and unilateral border closures were introduced in an attempt to slow the spread of the virus, causing a massive (but expected) shock to economic activity. The largest economies in the Eurozone, such as France, Germany, Spain and Italy, have all introduced economic policies aimed at softening the financial blow caused by the shutdowns. Measures such as state loans or credit guarantees for companies, income subsidies for affected workers, tax deferrals, or social security deferrals and subsidies were quickly ushered in. On a more local level, Luxembourg has also introduced a raft of measures to try and limit the economic impact of the virus, such as offering repayable advances to SMEs, changes to social security contributions, VAT payment and reimbursement facilities and introducing new partial unemployment schemes to dissuade companies from firing employees.

As ambitious as national programs can be, the response on the supranational EU level has been relatively slow, with EU leaders agreeing just last week on a €540bn rescue package for EU countries hit hardest by the coronavirus pandemic. Subject to final political agreement, the Luxembourg based crisis resolution fund European Stability Mechanism (ESM) will make Enhanced Conditions Credit Lines (ECCLs) available to all Eurozone countries. The total amount that could be disbursed under the ECCLs could go up to 240bn EUR with each country being able to draw up to 2% of its GDP.

Unsurprisingly, every sector of the economy is being hit, with the asset management sector being in the eye of the storm. Outflows from some of the largest asset management houses have in many instances surpassed those seen during the 2008 financial crisis. As recently as mid-March, mutual funds and exchange traded funds that invest in bonds experienced outflows of $109bn within one week, setting a new all-time record. Equity funds saw redemptions of $23bn in the first week of March, also a new record, according to data published by the Financial Times.

Investment managers are now being forced to introduce unpopular measures in an effort to protect their balance sheet. Amundi, for example, became the first major player to propose suspending the dividend payment for 2019, after its share price went down by more than 30 percent since hitting its record high of €78 on February 19th. It can be expected that other asset managers will soon be following Amundi’s footsteps.

However gloomy the data may currently appear, it is important for asset managers to identify the type of market rout that is occurring to position their strategy accordingly. It is safe to assume that the crisis caused by the Covid-19 is neither structural, uncovering some deep-seated economic imbalances and causing financial bubbles to burst, nor a cyclical event, where rising interest rates would dampen economic activity and depress corporate profits. It could be considered a one-off event, comparable to a war or a brief financial crash. Thus, if the right policies by governments are adopted and the strict lockdown measures can be gradually lifted over the next weeks, there is potential for a “V-shaped” recovery, lasting several months rather than several years.

Therefore, asset managers should try to avoid getting hot-headed by immediately taking drastic action unless absolutely necessary. They should rather use this as an opportunity to identify their weaknesses that were uncovered during this period, in order to improve their operating models for the future. The crisis clearly demonstrated that companies which embraced digitalization and invested into cloud technologies and setting-up the necessary infrastructure to allow employees to work remotely, were able to almost seamlessly transition into this new paradigm. There has been a visible increase in demand for services such as electronic signatures, video conferencing tools, and the required security infrastructure for teleworking. Companies which had this infrastructure in place before the emergency hit have now secured a distinct advantage over their competitors.

There are two main differences between this crisis and others. One is the level of uncertainty, due to its unprecedented nature. The second difference is that interest rates at major central banks such as the ECB, BoE or the US Federal Reserve have already been hovering at historical lows, leaving central banks with less tools to mitigate the impact of the crisis through monetary policies. Thus, as the crisis unfolds, it will be the actions of national governments and the policies they implement, regardless of how unpopular or unconventional they might be, that will determine how quickly the economy can begin to recover and how long this recovery will take.

Publié le 16 avril 2020