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Graph of the week

Graph of the week

27-03-2020 | Vision

Everything in the red

  • Jaap  van der Hart
    Jaap
    van der Hart
    Equity Fund Manager

You don't need to be an economist to appreciate that the measures to contain the coronavirus are having a big economic impact. While digital communication and the possibility to work from home could soften the blow in some areas, many other parts of the global economy have ground to a halt. 

Stock markets have reacted strongly to lockdowns around the world, with wild daily price swings that are similar to those seen in previous crisis periods. The table below shows the USD returns from 1 through 25 March of various MSCI countries and sector indices.

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The most important, the MSCI Word Equity Index, shed 16.5% in this period – close to the drops we saw during the global financial crisis and the market crash of October 1987. Emerging markets tumbled to a similar degree, by 16.7%. Measured from the beginning of January, the decline for both is even steeper, at more than 24%.

Europe is the worst affected region, China the least

In line with the spread of the virus, European countries have seen the biggest decline, followed by the United States. Japan has so far been more successful in containing the virus and, therefore, its market has taken less of a hit. In the emerging markets category, the Asian countries that have been most effective at slowing contagion have done relatively well. 

Covid-19 may have originated from China, but its further spread from that hotbed now seems to have stopped. Production facilities in the country are gradually being reopened this month and Chinese investors are confident that the government will shore up the economy if needs be. Ironically, China’s stock markets have thus suffered the least from the pandemic since January.

While Taiwan and South Korea have also been relatively successful in curbing the outbreak, with the aid of aggressive testing, strict monitoring, and targeted measures, these markets performed worse than China – partly because of the inevitable and imminent global recession. Other emerging markets have been hit harder though. 

These countries are still in the earlier stages of an outbreak, but there are fears they could be heading into a situation similar to that in Europe. Almost all countries are now imposing some form of lockdown.

Which sectors will be hit the hardest?

We have seen considerable differences within the MSCI sector indices. Defensive sectors such as non-durable consumer goods (of which supermarkets are a key component) and healthcare and have lost far less ground, and technology has also done relatively well. Energy has been hit the hardest, mainly as a result of the oil price crash from USD 50 to USD 27.

This is caused not only by the fall in demand, but also the oil price war between Saudi Arabia and Russia, which has led to increased input. Financials are also having a hard time, and the fear is that many companies will experience payment difficulties. Various government support packages could limit the damage, but banks continue to run a significant risk.

Is the economic pain from this month's sharp falls fully priced in now? It's too early to draw that conclusion. A long-term investor might say that, hopefully, we will get the virus outbreak under control somewhere in the next year or so, and that we will then have a normal economy again. But, in the meantime, some of the key questions are: how long will the lockdowns last and how severe will the economic damage be. 

Economic figures will fall deep into the red in the coming months. However, the most important figure now is the number of new infections. A market recovery depends most of all on whether these decrease and if the spread of Covid-19 can be contained.

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