Mar 26th 2020

Coronavirus and the global economy: yes, there really is cause for optimism

by Arturo Bris

 

Arturo Bris is Professor of Finance at  the International Institute for Management Development (IMD)

 

 

Stock markets are rebounding on the back of the newly agreed US$2 trillion American fiscal stimulus plan. It comes after a week that was the worst in history for the Dow and many others around the world. My impression is that the unfolding global recession has now been fully priced into stocks by investors.

That recession looks all but guaranteed, of course: Chinese GDP is estimated to have dropped 12% in the first two months of the year – a harbinger of what is coming everywhere. One useful guide is the market for corporate default swaps, which are financial instruments that investors use to hedge against companies running into trouble. The Markit iTraxx Europe Crossover index, which tracks European corporate swaps, is implying a 38% probability in European companies defaulting on their debts in months to come.

Yet let’s put things in perspective. The coronavirus is certainly causing a tragic loss of human lives, but the mortality rate appears to be lower than some early predictions indicated.

So what will be the economic impact of the lockdown measures required to keep the mortality rate down? A large part of the fallout to date – particularly on stock markets – has actually been from negative sentiment rather than real effects. The Baltic Exchange Dry Index, which measures the average price of moving raw materials by sea, is the best indicator of global trade in real time. It bottomed out in February and has since improved as the China crisis has receded – per the chart below.

Arturo Bris

It’s also interesting to compare the 2008 and 2020 market crashes. I have calculated the number of days to the lowest market level in 2008 and 2020, relative to the last previous day when stock markets were at the same level. For example the US stock market bottom of March 9 2009 was the lowest point since September 12 1996 – 13 years or 4,561 days earlier. The low this time, assuming it is not exceeded, was last seen on July 7 2016 – less than four years ago. The chart below confirms that this pattern has been seen in most markets around the world.

Arturo Bris

Assessing 2020

My late colleague Professor Stewart Hamilton was IMD’s specialist in financial crises. He used to quote the famous economist John Kenneth Galbraith, who said: “There can be few fields of human endeavour in which history counts for so little as in the world of finance.”

This certainly applies to 2020. Whereas 2008 was about a collapse in demand, the coronavirus is causing collapses in both supply and demand. It is not a banking crisis, at least not for the time being, so many corporations will hopefully be able to rely on bank credit, over and above government rescue packages. The economic impact is also apparently different across countries.

Interestingly, the stock market impact has been more severe on value stocks, meaning mature companies that attract investors by paying dividends, not because they are seen as having great potential for growth. Compared to the so-called growth stocks, such companies typically have lower ratios between their stock market prices and earnings (PE ratio).

The chart below shows different sectors along the x axis and shows their average PE ratios in the blue bars. The sectors towards the left, like airlines and finance, are value stocks. Those on the right, such as technology and healthcare, are growth stocks. The red bars show what has happened to their average share prices – in other words, how far they have fallen.

Arturo Bris

What it shows is that the growth sectors’ shares have declined the least. This is strange because in a financial crisis, investors tend to rely on stocks that provide value today. As finance economists say, “in winter we burn fat”. To me, this indicates light at the end of the tunnel; that companies who you would expect to generate growth, will still generate growth.

Seven recommendations

I know I am playing the optimist here, and the coming days may take me back to a different reality. But let us at least assume that we have seen the worst and it is now time to think about the after-crisis. What can be done?

  1. Governments and central banks have been quicker to respond than in 2008, but some sectors need more support than others. States need to encourage banks to lend and be flexible, taking advantage of ultra-low interest rates.

  2. Many are calling the crisis a black swan event, meaning a cataclysm that has caused great economic hardship and could not have been foreseen. But such a pandemic was expected in 2017. Policymakers can therefore use the data from this crisis to plan for future crises. Companies should learn from what has worked best and permanently make it part of their values: making employee safety their top priority, for example.

  3. The world will become less globalised now. Companies must adapt their supply chains and markets to protect themselves in the event of a repeat. That means refocusing on their home markets as much as possible now, and striking a new, safer balance between local and global after the crisis is over.

  4. The 2008 crisis had a massive impact on corporate investment from which we have not yet recovered, since the banking crisis meant that banks were unable to lend. Since 2020 is not about a banking crisis, companies will emerge strongest if they avoid under-investing.

  5. Government policies will determine how well companies can come through. So more than ever, the private sector must cooperate. It is not the time to complain about government, but to collaborate.

  6. Planning for different possible outcomes from this crisis is useless. It was the same in 2008. It is better to be resilient and reactive, and to focus on what is happening now.

  7. Finally, the best acquisitions are made in bad times. So for those companies that have the means, it is a good time to think about mergers and acquisitions because deals will be cheap.

Arturo Bris, Professor of Finance, International Institute for Management Development (IMD)

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Jul 7th 2020
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Jul 5th 2020
EXTRACT: "The war on Yemen begun in 2015 by Saudi Arabia and the United Arab Emirates has been a failure militarily and a vast drain on resources that, in the age of Covid-19, neither country can any longer afford. Not only has the war been Saudi Arabia’s Vietnam, it has inflicted untold human damage on Yemenis. UNICEF has a new report out warning that millions of Yemeni children are on the brink of starvation. Yemen, with a population of about 28 million (think Texas), is one of the poorest countries in the world. Saudi Arabia, with a citizen population of some 21 million, is one of the richest. The United Arab Emirates, with a citizen population of a little over 1 million, is likewise very rich. Both have waged a high-tech air war on the indigenous Yemeni Houthis, but in the past year have pitched their Sunni proxies against one another."
Jun 25th 2020
EXTRACT: "The facts are clear: the wealthiest 0.54%, about 40 million people, are responsible for 14% of lifestyle-related greenhouse gas emissions, while the bottom 50% of income earners, almost 4 billion people, only emit around 10%. The world’s top 10% income earners are responsible for at least 25% and up to 43% of our environmental impact. Most people living in developed countries would fit into this category, meaning you don’t have to consider yourself rich in order to be globally affluent. Even many poorer people in wealthy countries have a disproportionately large and unsustainable resource footprint compared to the global average."
Jun 24th 2020
EXTRACT: "To be sure, the American Dream was always more aspiration than reality. Economic, social, and intergenerational mobility have always fallen short of what the myth of the self-made man or woman would lead one to expect. But with social mobility now declining as inequality rises, today’s young people are right to be angry."
Jun 19th 2020
EXTRACT: "There is only one way to repair America’s reputation, regain the trust of allies, and ensure that the US can act as an effective counterweight to China: address the root causes of the cracks that Trump’s disastrous presidency has exposed and widened. This is in line with the vision advanced in 2011 by two military strategists, Captain Wayne Porter and Colonel Mark Mykleby, using the pseudonym “Mr. Y.” Porter and Mykleby argued that national security depends not only on the capacity to respond to threats from foreign powers, but also – and perhaps more important – on the “application of credible influence and strength.” That influence, in turn, depends on America’s success in providing a “pathway of promise” for US citizens – and a model for the world."
Jun 14th 2020
EXTRACT: "The most critical question then is not how far Trump will go to promote his treasonous agenda, but for how long Republican leaders will silently accept and subserviently enable Trump to destroy the basic moral tenets and values on which this Union was founded, and which they swore to uphold and protect...............Of course, shame on us if we continue to be surprised by Republicans’ continuing silence, because as we all know, even when presented with overwhelming evidence that Trump committed crimes against the American people, Trump’s Republican stooges in the Senate exonerated him following impeachment almost unanimously...................The Republican leadership, to be sure, has made its bed. It has committed moral suicide. History will judge them harshly for their treason and betrayal of the nation, including all of those who have lived and died throughout our history to foster and protect our safety, integrity, and freedom."
Jun 9th 2020
EXTRACT: " Governments can do nothing about the quotidian offenses of living as a black person in America – the empty taxis that refuse to stop, being mistaken for employees in supermarkets, the myriad intentional and unintentional insults. Many now in the streets won’t be satisfied unless the result of this national spasm is improved schools, health care, and job opportunities for minorities – a fair shake for black people. What will happen when America once again falls short of honoring its professed values?."
Jun 8th 2020
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Jun 4th 2020
EXTRACT: "Many Americans are clearly horrified by their president’s crass and incendiary words. But will their disapproval be offset by anxiety about violent social unrest? Will age-old racial prejudices, often unspoken, or even acknowledged, still make them vote for the false security of a coarse white bully?  Much will depend on how hot this summer gets. If people think rationally in November, it is hard to imagine that enough of them would vote to keep this appalling administration in power for another four years. But fear is reason’s worst enemy."
Jun 2nd 2020
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May 27th 2020
EXTRACT: "Obamagate is the latest conspiracy theory to be pushed by US president, Donald Trump. It started on the morning of May 10, when Trump retweeted the word “OBAMAGATE!” By the next day, the Obamagate hashtag had accrued over two million tweets and another four million by the end of the week. Trump has repeatedly reused the slogan on his Twitter feed since and it has been promoted by right-wing influencers including Glenn Beck, Sean Hannity and many others....You are not alone if you’re confused by what Obamagate actually is or why Trump is tweeting about it."
May 23rd 2020
EXTRACT: "Not all aspects of our near and medium-term future can be foreseen at this juncture of the Covid-19 pandemic, but we now know enough to make some hypotheses about what is likely to change, based on what has already changed. The future is sure to look very different than it did before this decade began, regardless of whether a vaccine is found. If a vaccine is found, it is unlikely to be tested, approved, manufactured, and efficiently distributed to the world’s population of nearly 8 billion people for years. Bearing in mind that there is no vaccine for any coronavirus, what is likelier is that the world will be living with Covid-19 as a part of our ecosystem for many years to come – possibly permanently. That means that our new normal is probably already here."
May 21st 2020
EXTRACT: "LONDON – The new Franco-German proposal for a €500 billion ($547 billion) European recovery fund could turn out to be the most important historic consequence of the coronavirus. It is even conceivable that the deal struck between German Chancellor Angela Merkel and French President Emmanuel Macron might one day be remembered as the European Union’s “Hamiltonian moment,” comparable to the 1790 agreement between Alexander Hamilton and Thomas Jefferson on public borrowing, which helped to turn the United States, a confederation with little central government, into a genuine political federation."
May 19th 2020
EXTRACT: "In April 2011, Donald Trump, then considering a run for the presidency the following year, said that he had sent investigators to Hawaii to check out rumors that President Barack Obama wasn’t born there, but in Kenya, which would disqualify him for the presidency. His investigators, Trump declared, “cannot believe what they’re finding.” I can find no record of Trump being challenged on this outlandish claim at the time. In the fall of 2016, Trump, now the Republican presidential nominee, was convinced by his staff that he had to abandon this “birther” nonsense. He did so reluctantly, charging – also with no evidence – that such rumors had actually been initiated by his opponent, Hillary Clinton. There, in a nutshell, is Trump’s modus operandi: he’s not just a liar but a fabulist, seemingly unconcerned with whether his fictions will be exposed. If they are, the world simply moves on as he invents fresh distractions."
May 19th 2020
EXTRACT: "Li, a doctor, was purportedly silenced and chastised by Chinese officials for warning on December 30, 2019, about a new virus in the Wuhan hospital where he worked. When it became evident that he was on to something serious – so serious, in fact, that it ultimately killed him – the Chinese government changed its tune and celebrated Li’s bravery. If only that had happened sooner, the argument goes, the world would have avoided this horrific pandemic.................... But that’s not what happened."
May 9th 2020
EXTRACT: "Jana Winter and Hunter Walker at Yahoo News broke the story that 11 Secret Service agents have tested positive for the coronavirus. Likely some of them served in the West Wing. This week it was revealed at that a US military valet who brought Trump food came down with the virus, sending Trump into a “lava level” rage. Two aides to Vice President Mike Pence have tested positive. Some observers are afraid that the virus is circulating in the West Wing itself."
May 6th 2020
EXTRACT: "There has been much debate around the world about the source of the COVID-19 pandemic, ranging from a laboratory to Wuhan’s seafood market to some other form of animal-to-human transmission. While there is no proof (yet) that the virus may have been inadvertently released from one of the two biological research laboratories located at Wuhan, there is evidence that viral release has occurred in the past, and a host of additional data that point to a laboratory connection. "
May 4th 2020
EXTRACT: "A better bet is that nothing will be the same. Wealth will be destroyed on a catastrophic scale, and policymakers will need to find a way to ensure that, at least in some cases, creditors take part of the hit, a process that will play out over years of negotiation and litigation. For bankruptcy lawyers and lobbyists, it will be a bonanza, part of which will come from pressing taxpayers to honor bailout guarantees. Such a scenario would be an unholy mess."
Apr 29th 2020
EXTRACT: "We need the twenty-first century’s two superpowers, America and China, to set the example, by burying their rivalry and uniting all of humankind around a collective response to the current crisis, and to those that await us. As COVID-19 has taught us, the old international system can no longer guarantee humankind’s safety and security. We cannot afford to be taught that lesson twice."
Apr 29th 2020
EXTRACT: "It should come as no surprise that Trump has abused his power in orchestrating the federal response to the pandemic. For example, he made sure that Colorado received 100 much-needed ventilators, and made sure that Colorado voters knew it, in order to help re-elect troubled incumbent Republican senator Cory Gardner.  More alarming, Trump effectively threatened to wage germ warfare against US Postal Service workers by denying them congressionally approved virus-mitigation aid unless the USPS quadrupled rates on packages. Trump’s actual target was Jeff Bezos, the CEO of Amazon and owner of The Washington Post."