The COVID-19 virus has come to affect the global economy know as the corona shock.
What has been the effect so far?
It has upset the worlds stock markets with the largest exchange, the New York Stock Exchange has seen record volatility dipping to its lowest point in years. Having unforeseen dips with day trading and having dramatic effects on business throughout the globe, one major investment bank has said that American GDP for Q2 could drop 24% for the second quarter of the year (Source ILO). With this effect, the IMF predicts that 25 million jobs are at risk and at least a recession being reported as of the level of the 2008 global financial recession (Source IMF). In fact, Kristalina Georgieva the president has gone on record and stated to expect at least a rescission of the impact that we have seen in 2008. Although countries did have packages in place for this they are far from prepared. In the 2008 recession, it took 2 years for the S&P 500 to drop 49% and then lead to a 60% fall in the S&P. While the COVID-19 has seen the markets fall by a third in just one month. As well as the market it has had an effect on commodities, every major commodity has gone down copper, gold, iron since the outbreak.
The final extent of the damage will only become apparent when we start to see a recovery that shows speed and strength. Economists are still trying to predict 3 ways in which this can happen, one is an L shape recession where it dips, and then goes on for a while (imagine the letter L on the graph of GDP growth) or a V where it would bounce back up again or a U for a long recession but still prolonged.
The most pressing news from China is that this is a V shape rescission.
In short the governments (U.S and Europe), are in a hard situation where they have to figure out trading off lives by the effect of the long term growth.
Sectors at Risk
Sectors that could be at risk, are Tourism and small business. World tourism in February has fallen 58% alone (before the full impact of the virus could be felt). This has seen small businesses to big corporations make big cuts in its 2020 profits outlook. Major Companies such as Marubeni (oil company) outlook went from a $2.7 billion (U.S) profit in 2020 to $1.9 billion (U.S) loss. JXTC has gone from profitable to $2.7 billion (U.S) to a loss.
With 125, which is over half, of public companies on the NIKKI 225 (Japanese largest market index) having cut down their 2020 profit outcast (Source Sumuto corporation).The credit Union, worldwide stating in a recent survey that 34% of all companies could have had some kind of financial difficulty.
So can we combat the global shock that the world is facing,
Well, unfortunately, for small businesses it will be hard. An outlook on small business compared to independent department stores from March 19 to March 20 fall by 43%, unlike the bigger companies, these don’t hold a lot in cash reserves to survive these types of events.
A study, in the U.K, found that the average small business has only enough to survive for 3 months. Within Japan, the number of cases seeking Financial help is over 400,000 the U.K over 300,000 and the U.S with expected to be over 1.2 million (source NHK).
Not only small businesses are affected with 6/8 world leaders in the automotive sector shutting full production of their plants.
Is there any upside to this?
What we have seen in peoples behaviours, have abruptly, changed where online companies and internet business have actually thrived. E-commerce businesses that have actually thrived in this are Uber eats and Amazon delivery, plus anyone that sold facemasks or hand gel. Not all GDP has been lost, some has been transferred.
How is it different from the 2008 crash?
The 2008 financial crisis hit major large companies, such as big financial and insurance companies, while now we have seen more of an effect on small companies, be that tourism and small businesses.
The effect on the U.S that will trickle down
There is no market more prevalent than the U.S that accounts for ¼ of the world GDP, this being $20 trillion. While personal consumption accounts for 70% of that GDP. With COVID-19 virus, rapidly going through the U.S this consumer spending is declining.
New York, the hardest-hit area of the U.S, contributes $1.7 trillion annually to the above GDP, this equated to a loss of $4.6 billion a day. Although not all GDP is lost, it is still a massive number and the full effect on New York has still not hit its peak yet.
How has this presently hit the U.S economy?
Well, the unemployment data shows, 3.3 million people in March, this was 10 times the amount that it was 1 week prior to the virus outbreak (Source U.S initial and Insurance claims). The worst figure on record currently.
Why is the U.S in danger? The U.S doesn’t have universal health care. Although they are doing, free tests but after this. It will have a high cost after this and this will enforce people to stay at home and stop consumption in order to avoid possible infection.
Why is this effected on the world scale?
Well take the worlds 3rd largest economy, Japan, it relies on the U.S for 55% of its exports (Source Bank of Japan). And this is copied throughout the world.
Trump, has acted fast in this implementing a $2.2 Trillion U.S package. But will this be enough? This is different from 2008 where they implemented monetary easing. Monetary easing will fail to work as interest rates are also low.
Global Impact by Sector
As this is a global impact, in February we have seen a 66% fall in clothing, a 72% decline in aviation travel and 37% drop in food production imports.
Effects on Europe
Well, Europe had an open border policy for people and money to try and stimulate the economy, with the virus we have seen Europe shut its borders for free movement. This has also hit Airlines with Lufthansa closing 90% of its flights and hitting the main areas of the European manufacturing, automotive, with the main automotive sectors, Daimler, BMW, Volkswagen have all shut factories. (Source European central bank).
Global Stimulus Packages
So what are countries doing:
U.S is paying $1,200 per adult the
- U.K is paying 80% of the works salaries (furlough Scheme)
- While Germany companies with 5 employees get 9000 Euros
- While companies with 6-10 will get 15,000 Euros
- Japan is looking at 300,000 Yen deal.
What to expect
Well, look at China, although I know that not every country has the policy that China has in locking people down and keeping things under control, so for what time we will see the financial impacts start to gain again is anyone’s guess and depends on the nature of the virus.
In recent, days we have seen a stagnation in infections in some of the recent hit areas in Europe (mainly Spain and Italy). So positive signs.
China had 20% negative GDP growth in February, even reported by its own standard this is outstanding as normally it is in the plus for each month. Manufacturing is getting back to normal and somewhat increasing. The outlook for 2020 is 5.6% and 2021 5.8% not much less than what it was originally predicted by focuseccomics of 6.2% in 2020 in 2019.
From a market perspective
Is now a once in a generation opportunity to invest, given the recent market falls?
Just over one month ago, in late February, the US S&P500 and Nasdaq hit record highs, despite the fact that the coronavirus was getting worse.
As if you keep an eye on markets and pandemics or events, markets went up during the Spanish Flu Influenza of 1918-1920, despite there being a world war on top of the virus.
The same thing happened during HIV and various other pandemics.
This time, stock markets have reacted to the government shutdowns of large parts of the economy, which didn’t happen in 1918-1920.
What do we know from past experience?
The average bear market doesn’t last long as the statistics show. Even during 2008, it took markets 3 years to recover from the falls.
Markets have always recovered for over 100 years in the US and UK, despite countless previous huge falls.
Anybody buying at these levels has tended to get high returns in the subsequent 5 years. For instance, in the 5 years after 2008, investors in the S&P500 got about 15.80%.
Most successful investors, including Warren Buffett, advocate taking advantage of market falls.
The past is no definitive guide to the future for investment returns. A long-term investor though should see themselves as a collector.
Cheaper prices are good for net buyers (those not in retirement). Market falls are bad for net sellers (retirees who have to sell to fund their lifestyle).
For anybody with a 10 year+ time horizon, these valuations represent an excellent opportunity.
Is now a good time to buy?
In short, I always refer to the saying by Warren Buffet “Be fearful when others are greedy and be greedy when others are fearful”. I am not sure what will happen in the short term but know that buying an index ETF that is 30% cheaper than what it was 3 weeks ago is better value if the growth goes back to normal.
What should I do if my portfolio has dropped?
I have been asked this a lot in the last few weeks as many have seen a lot taken off the portfolio. So what can be done? Well if you are in for the long term (this being 10+ years left) and have a balanced portfolio for your investment risk, it would be sensible to leave it as the markets will eventually return to what they were before.
Remember when you are buying stocks you are buying part of the company, and if you believe long term value in the company why would you sell. “If this was your house would you sell your house if the valuation has just gone down 20%” this was a quote from Warren Buffet in relation to the outbreak.
What I am doing right now?
I have actually got into the market, and with an S&P ETF as seen with S&P and market dips over the long run has always come back stronger. In the long term, the S&P has seen the growth of 8%+ per year when you take an average of 10 years. Like I mentioned before if I were to reverse the situation about what Warren Buffet said about the house if you could buy a house 20% cheaper than what it was 3 weeks ago would you buy it?
Another one that I have gone into this is for the short term and not with a major part of my portfolio is oil.
Brent crude ETF has taken a hit in the last 3 months it has taken a hit of 60% in the first 3 months.
The Saudi Russia argument, and has kept getting lower in part as well to the slow down in growth, to 33.87 USD 4/7/20 per barrel falling from 70 USD per barrel in December 2019.
Opec, which works hand in hand with limiting supply, to try and keep an outflow going on 6th March. OPEC though cut production in response to COVID-19, although on this occasion Russia at the meeting in Austria said no. This is where it all kicked off.
This angered the Saudis where they started to flood the market with much more and much cheaper oil. Increasing 25% to 12.5 million barrels a day was followed by the UAE and event Russia increasing by 500,000 barrels a day.
This with higher production and lower demands a now oil crash happened.
This will be a headache for oil-producing countries and companies. This will see the middle east, Africa & other countries suffer dramatically. But most of all, this will hurt the U.S.
The U.S has become a world leader in oil again using a technique called fracking this is costing a lot to extract the oil. The U.S has now become the worlds largest producer. But this is not well, for the U.S as Fracking costs 40 USD per litre of oil more than Saudis cost to extract oil and at 33 USD per barrel, the numbers don’t add up. This has pushed the U.S and Saudi to look at their own deal together.
How long can this go on for?
Trump won’t want to keep this going on for too long as it’s an election year. This is a Russian poker game, that even Russian oil companies, don’t want.
So, is this a game just to cut U.S oil power?
This could actually work well for Saudis because they are wanting to flood the market as they have fallen out with the Russians and with its low extraction cost, it is achievable. Although, in theory, this has its problems.
At this low price, few countries can actually make a profit on oil due to the way that it is extracted, with Saudi being one of the few. As well as this Black gold, it is still the lifeblood of the world.
Therefore OPEC will want to increase the oil price, this will be added when the virus slows down and growth in imports and exports will increase back to normal levels and after the event, it may have increased imports and exports to make up for lost time. Therefore, I would assume to expect growth. This is not an ultra-long asset to have due to the shift in the energy source. It would be hard for production to stay at this price for a sustained period of time. Therefore have invested in US brent oil fund.
