The COVID-19 global pandemic is redefining market mechanics, policy responses, and business operations. CFA Institute convened a panel of experts — including Nicholas J. Colas, co-founder of Datatrek Research; Meredith Sumpter, head of research strategy and operations at Eurasia Group; and Jack Ablin, CFA, chief investment officer at Cresset Capital — to discuss the pandemic’s effects on global economies.
Starting off with a positive note, Ablin said that we are going into this with our eyes wide open — more so than in the 2008 Global Financial Crisis or The Great Depression of the last century. The large, rapid response in the United States has amounted to roughly 35% of GDP. Sumpter was encouraged by the aggressive fiscal and monetary policies pursued by developed economies around the world, saying that the pandemic has revealed the resiliency of human nature.
However, Sumpter also urged policy makers not to “waste a good crisis,” hoping that governments would look beyond the immediate threats to include reforms that affected things like access to healthcare, the nature of work, and employment opportunities. These efforts could build an environment more suitable to 21st century realities on the other side of the pandemic.
What Do Clients Want to Know?
Ablin’s clients have been focused on getting through the hold placed on global economies. His firm has reviewed portfolios on a security-by-security basis, looking at earnings, credit, valuation, and overall assets to get through a very difficult economic and credit environment.
Colas has been working with clients who are looking for a playbook from past catastrophes, asking whether these markets look more like 1929, 2008, or the months following the September 11 terror attacks — however, most of the data that investors would rely on is missing. Investors are also asking how they can value assets when central banks are so involved in setting rates, which is a question that has yet to be answered.
Sumpter explained that Eurasia Group has three model scenarios reflecting different peaks for the virus and different scenarios for re-opening the United States economy, but none of them are certain at this time. The virus could peak in late May, mid-summer, or the end of the year, and that will impact the nature of the recovery, supply chain effects, international cooperation, and the price of oil.
Under the most painful, severe scenario forecast by Sumpter’s firm, the U.S. would see repeated economic starts and stops as attempts at containment failed. It could lead to supply chain nationalization, a persistent drag on the economy, no coordination among countries, and the price of oil falling to below $20 a barrel.
Recession or Depression?
The group discussed the possibility of a financial depression — referred to as the “D” word. Colas was clear that the United States is already in a depression, by economic standards. U.S. unemployment rates ranged from 20% to 25% during the Great Depression, and Colas expects the U.S. economy to see unemployment numbers ranging from 15% to 30%. “At least this time the politicians are responding like it’s a depression,” he said.
Ablin agreed that policy responses have been more appropriate than they were in 1929. He noted that in the U.S., the term “depression” evokes imagery of bread lines and people sleeping in the streets. The massive, global response to the pandemic has been encouraging and completely unlike past responses to financial crises.
The unemployment numbers reported over the next few months may not reflect the true state of the labor market, depending on whether businesses use government loans to pay employees or fund business operations. Sumpter noted that many workers must prepare for a transition to the digital world, which will require assistance from governments and the private sector in the not-too-distant future.
Globalization and Global Impact
Sumpter noted that the virus has accelerated a trend toward protectionism that has been happening since 2008, and she expects the decoupling of the Chinese and U.S. economies to continue. More nationalism is on the horizon, and many countries will focus primarily on their domestic needs.
Emerging market countries may have difficulty supporting their economies and funding their healthcare systems, especially when they have significant debt obligations to meet. Sumpter noted that many developing countries have stimulus packages that are around 1% of their national GDP, and rescue measures in Brazil and Chile are 3%–4 % of GDP, compared to the U.S. stimulus package that is already 35% of GDP.
The world is addressing the right concerns, but the timing of when economies can open is unclear. Every panelist agreed that each country needs more widespread testing, and the development of a vaccine will be important for a full economic recovery. Eventually, markets will return to normal and humanity will prevail. We may even end up stronger if we heed Sumpter’s advice and use this crisis to make improvements. Ablin closed on a positive note, saying that “Investors are generally pretty optimistic, and they can see solutions coming even if they are months away.”
This year, archived recordings of every presentation from the CFA Institute Annual Virtual Conference will be available online, with additional insights and commentary published on the CFA Institute Annual Virtual Conference blog.
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