PROSPECTS FOR ECONOMIC RECOVERY VS RAPIDLY SPREADING CONTAGION
Volatility shot up on equities towards the end of last week, sending share prices down sharply. Investors had to revise their numbers in the face of the IMF’s doom-laden economic forecasts (released on 24 June), the soaring number of Covid-19 cases in southern US states and China, and the higher-than-expected rise in new jobless claims.
According to headlines over the weekend, Covid-19 has now infected more than 10 million people worldwide and killed about 500,000 of that number, dashing hopes of a swift economic recovery. Another explanation for the correction is that the steady rise in share prices since late March had become disconnected from fundamentals in the minds of investors, many of whom are still cautiously underweight in the stockmarket, even as alternatives are lacking. That is a reassuring point for the future, especially as dividend yields are generally beating bond yields at the moment.
According to the IMF, the current slump is unprecedented, and it sees global GDP plunging by a record-breaking 4.9% in 2020. Worse still, the recovery is expected to clock in at just 5.4% in 2021. France has been singled out as one of the worst-affected countries, with a contraction of 12.5% projected.
Banking stocks were sold off last week in response to the results of US stress tests. The Fed has moved to suspend share-purchasing programmes and freeze dividend increases for major banks until September. But there was also positive news from US regulators, who are due to loosen the terms of the Volcker Act. If these changes go through, banks will be able to invest more easily in venture capital, and collateral on derivatives transactions will also be reduced.
Treatment of the virus is improving, leading to a lower proportion of persons hospitalised and fatalities. Even so, the business recovery is making a stuttering start, with fears of further closures looming if the pandemic were ever to get out of control again. Still, it is unlikely that a large number of industries will be shut down again, given the resulting damage to the global economy. The upturn will be slow, granted. But continued fiscal splurges, together with monetary giveaways by central banks, will provide vital support to economies. In that respect, investors can find refuge in the noble actions of the ECB, which has calibrated its quantitative easing in proportion to the gravity of the situation, while at the same time offering perfectly adequate guarantees.
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