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Will the virus outbreak lead to a global recession?

The impact is beginning to be felt around the world

01 April 2020

The risks of a recession have increased, as more consumers elect to stay at home and restaurants, pubs, and factories shut up shop.

Our Chief Investment Officer discusses the likelihood of a global recession as the world braces for the impact of coronavirus.

The current landscape

Markets have been grappling with the unknown economic impact of coronavirus. Meanwhile, the risks of a recession have increased as consumers have stayed at home and factory closures have disrupted supply chains.

But it’s not all bad news. The US consumer was in robust health going into this situation which gives us some comfort. Meanwhile, policymakers are taking action with the US Federal Reserve cutting interest rates by 50 basis points. We expect the world economy can avoid a recession and should see a recovery in the second half of the year.

In terms of portfolio positioning, we had increased exposure to Emerging Markets Equities and reduced our developed equity exposure a short while before the impact of coronavirus. Since then, we have used the market falls to buy back some of that developed equity exposure.

As ever, we recommend investors get invested, stay invested and stay diversified.

Is recovery in sight for flu-hit markets?

As part of our aim to keep clients informed of our current investment views and how these themes are impacting your discretionary portfolios, Phil Attreed, Head of Investment Consulting, talks to Will Hobbs, Chief Investment Officer, about the impact of the coronavirus and whether the world is heading for a recession.

PHIL: Hello and welcome to another edition of Monthly Market Insights. As always I'm joined here today by Will Hobbs, our Chief Investment Officer. Now Will, Toby and you spoke at some length last month about the viral outbreak in Wuhan but things have moved on quite a bit since then in the last month. We've seen some pretty unsettled markets actually particularly in the last week or so. We actually had US stock markets down 10% in a week, back up 5% in a day. We've seen interest rates particularly in the government bonds space coming down quite markedly and some pretty big movements in some of the more economically sensitive commodities as well. And I guess most of that really is this the rising concern of investors as they've taken account of it moving from a contained situation in China to more of a global health scare.

WILL: Yes, that's exactly how we'd characterise it, Phil. It has become global really. Now we're moving increasingly from containment efforts to almost mitigation efforts and trying to work out how to minimise the effect on the various health systems. So markets have really been grappling with the size of the economic effect and the reality is that's extremely difficult to get on top of in reality because a lot of the data we're looking at is going to be warped for a little while. We still just don't know the size of the economic hit coming down the pipeline.

PHIL: And as you say, a lot of that data has been what we've seen evidence of that already in some of the Chinese data that's already come out. How are you and your team looking at that data and what are your thoughts around an imminent recession?

WILL: That's something that we'd kind of parked for a while I think at the early part of the year, but very quickly it's back with us again. Yes. It's interesting I mean going into this year, we'd actually found that in our estimations the risks of in an imminent of recession have been going down, our recession probabilities had been going down a little bit. The data had been telling us actually the economy had been getting a little bit better and then this comes out of the blue. In terms of the risks of a recession, I guess there's a couple of things to look at. Like I say, we are looking at a large and indeterminate, evolving hit coming down the pipeline at the world economy. Some of that's based on the demand side of the economy, so consumers are going to be to a certain extent forced to stay at home, not go out to restaurants, all that kind of thing and that's going to have an effect on demand. Some of that won't come back. There's also supply issues, the fact that workers won't be going to factories. We've already seen that in China and that's hit supply chains and that's rippled along various supply chain networks as well. So there is a big hit coming down the pipeline. Now in the positives column there's a couple of things: one, the key actors in the world economy, or some of the key actors, the keystone of the world economy, the US private sector, particularly the US consumer, and in fact a lot of the developed world's consumer, was in reasonably robust health going into this situation. So debt loads, debt financing was relatively cheap, employment relatively high, very high in some places. And a lot of other factors besides that as well. So that gives us some comfort. You're also seeing policymakers very active. You may even see some sort of fiscal activity as well. Now there's not much that anyone can do in the very short run to alleviate the viral impact, but that does potentially supercharge the rebound. So our best guess, but it is a guess, is that the world economy can avoid a recession and that you should see a recovery in the second half of the year. But we've got to watch this situation very carefully obviously.

PHIL: Clearly our investors are watching the headlines that are coming out and are likely to be very nervous about what that means for their portfolios. Obviously a lot of the headlines are very equity focused those are some of the bigger movements that we've been seeing; they catch people's eyes and obviously make good headlines. In terms of how the portfolios have been holding up and also for those investors who are maybe thinking that they might want to come out and sit on the fence a little bit, maybe try and time entry back in when things look a little bit more certain, possibly a bit more positive, any advice there for those investors?

WILL: It's an absolutely key question, Phil, and I think there's a number of things to think about with regards to that. Remember that markets are relatively efficient, so they price incoming information relatively accurately, quickly, so everything you see today is already in the price: the risks of a recession, all that kind of stuff. That means that you're really second guessing the market if you're thinking: 'I need to get out now'. The other point to think about really, with regards to anyone investing more than five years, is that in a sense the next recession, about the presidential elections, what the outcomes of Brexit, all these kind of things, they're all quite a lot of noise to be honest. The real thing you're really thinking about is: 'do I believe the humankind is going to continue to invent new stuff and get better at using that new stuff?' That's productivity. Because that's what you're accessing with the diversified portfolio. all of those efficiencies that companies manage to find, that's really what you're accessing. And so in a sense all you're really thinking is: 'do I still believe that exists?' And if so, then you can tune out a lot of the noise right now and focus on that story alone. Now internally obviously we have a large team of professionals who are dedicated to try and find little ways of adding extra performance to portfolios and that they're very much doing at the moment. These kind of moments can come within efficiencies. Emotions are high, understandably so, and that can create opportunities for the dispassionate investor, which is necessarily our job in these situations.

PHIL: Will, as always, thank you for your insight always very helpful to have your views, our thoughts go out to those who've been impacted by this viral outbreak and clearly we hope that the containment of that comes about over the coming days, weeks, and months. And with that of course markets hopefully behaving a little better. That just leaves me as always to thank you for joining us for another edition of Monthly Market Insights, we look forward to seeing you again next month.

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