Banca March specialists have opened a free consultation service of macroeconomics and markets to resolve the doubts that most concern investors in the context of uncertainty created by Covid-19. Questions can be sent to the address email@example.com.
These are some of the questions that the entity’s experts have answered:
Can you give any estimate of what economic growth will be like by 2020?
Although at these levels the market has already priced in a global recession for 2020, at the moment it is impossible to estimate the exact date on which the virus will be under control. If the coronavirus were controlled before the end of the second quarter, global growth would still be modestly positive.
Are there areas less affected by the coronavirus? Asia? U.S? Other developed or emerging countries?
In a prolonged global quarantine scenario, with movement restrictions for people and goods, the most affected countries are those that depend the most on the exterior. In this sense, Europe and, more specifically, Germany and Spain are countries that would be especially affected by dependence on exports or the tourism sector.
The USA, whose exports account for 13.4% of GDP, would be one of the least affected countries.
Why is the market not reacting favorably this time to stimuli from central banks?
Because fear of the global spread of the virus (60% of registered cases) and fears that economic paralysis could lead to problems within the credit market weigh more heavily. However, we believe that the action announced in recent days by central banks significantly reduces the economic consequences of the quarantines that will eventually materialize globally. In any case, additional fiscal measures are necessary to curb mistrust. In previous sanitary crises, the floor of the bags has been reached coinciding with the maximum increase in infections. Central bank policies are a fundamental part of the remedy, but the virus must stop spreading for markets to turn around.
If we endure the downpour of these weeks, can we think of a world that grows healthier in the coming years?
Everything makes us think that we are heading into a period of world quarantine that will last for weeks. The determining factor to know the duration and subsequent impact on the economy is to know when the US and the United Kingdom will join the measures implemented by other European nations such as Spain and Italy. The measures announced by governments and central banks are aimed at limiting the contraction that the economy will have in the next two quarters. They will provide good support that will materialize with strong growth in the last quarter of the year. As for what it will be like, 0% rates in the US and negatives in Europe and Japan will help growth, but very moderate and notably below the 3.5% average of the last decades. In the medium term, the emerging countries and the sectors linked to technology, the change in lifestyle and consumption and infrastructure, are the ones that will behave best in a world of reduced growth.
Can states afford fiscal stimulus measures that complement monetary stimuli, given the situation of public debt and deficits? In your case, what kind of measures?
With few exceptions, such as Germany and the Netherlands, public deficits are high globally and limit the ability to act. However, given the seriousness of the situation, it will be allowed to breach the maximum limits again. For example, Italy and Spain, with public deficits of 2.5%, have already announced two separate programs. Fiscal policy is a good economic policy tool that is to be used at times like today.
The fall of the bags, does not already reflect a scenario of global recession?
The markets advance events with a speed and precision that never ceases to amaze. It is true that sometimes they exaggerate the movements and the corrections are abrupt. At the present time, we believe that the current quarantine situation has been discounted very quickly, but we must wait to see what measures are adopted to try to calibrate, in the case of stock markets, levels of economic benefits that we can estimate for next 12 months and so we can get a better idea of current valuations.
What are the signs that will tell us when to take more risk?
This environment is unprecedented for everyone and any hypothesis must be validated almost daily. However, we believe that the two catalysts that would make it possible to fix a floor would be stabilization in the number of infections and concerted action by all states to agree on economic, monetary and fiscal measures.
When is it foreseeable that we will see them?
Looking at the profile of other crises or violent market corrections, we believe that the depth of the decline already reflects pessimistic scenarios of growth and uncertainty, although the market will require several weeks, perhaps months, to settle.
How can we manage these two variables so uncertain about how much and when?
In our opinion, delegated management is the best formula to take risk again. They are formulas actively managed by professionals, with defined action bands, access to the best managers in the world and an equally delegated operation, which eliminates intermediate steps at the most opportune moment. In the case of Banca March, all management profiles have a wide margin of maneuver to increase risk, with the possibility of being selective in regions, sectors or management styles. It is a good time to combine active funds with index funds that offer us speed, precision and liquidity when entering the market.
Should we try to stay ahead of the market with some more drastic risk reduction investment decision?
The extreme movements that we are experiencing in these last sessions do not recommend making these kinds of decisions for various reasons: the volatility of the markets themselves caused by a situation never experienced to date; fund portfolio management, in which the transfer operations make it very difficult to carry out any type of market timing; and because being out of the markets would make us lose the best days of recovery.
What do you recommend to a client who has a high level of liquidity and who is well below the risk that corresponds to their profile?
As we have commented, it is not foreseeable that the recovery will draw the same profile as the fall, a violent and fast V. Rather, we hope to settle a ground with concerted economic measures and the stabilization of infections before starting a firm recovery. However, history has shown the inadequacy of being completely out of the market: on the one hand opportunities are wasted but, in addition, we would be in the position impossible to find the evidence or the optimal conditions of security and price to enter. They never occur, so it must be done progressively and through professionals. We believe that active management products with an asymmetric design in terms of profitability / risk are suitable to restart the path towards risk positions.