All things market related


By Shruti Yadav


A new wave of COVID-19 threatens to undo Australia’s good work containing the virus. Locally acquired cases were virtually stamped out a month ago, largely because of stay-at-home rules and the quarantining in bleak hotels of the few people still allowed into the country. Victoria’s problems started with breaches of the mandatory two-week isolation for those arriving from abroad.

Here’s a quick snapshot of where Australia’s at with the number of cases:


Currently, all residents of one locked-down public housing tower will be required to isolate for a further nine days, Melburnians have been recommended to wear masks in public situations, and the NSW-Victoria border has been closed.

There have been more than 12 million confirmed cases of coronavirus across the world, and more than 548,000 deaths have been recorded. Abroad, President Donald Trump has threatened to pull funding from schools which do not reopen amid the pandemic as the US case total passes 3 million.


Current state of risk asset valuations

It would be an understatement to say that the world is going through unprecedented times both in personal aspects and as investors in financial markets. The pandemic unleashed the fastest bear market in history: At its lowest point, the MSCI All Country World Index hit −32.9% for the year, and it took only 40 calendar days for a −34.8% peak-to-trough correction. Global investment grade credit spreads (per the Bloomberg Barclays Global Aggregate Corporate Index average option-adjusted spread) also widened significantly, exceeding 400 basis points (bps) at the peak.

Yet the bounce has been equally impressive. The deepest and sharpest recession in modern history is being matched with the biggest synchronized monetary and fiscal efforts globally ever seen. (Specific to U.S. policy, learn more in our recent blog posts on the Federal Reserve’s actions and on U.S. fiscal relief.)

According to PIMCO, Investors should consider structuring multi-asset portfolios to participate in upside scenarios, while remaining resilient in turbulent markets by emphasizing on Growth and Quality stocks.

Surveys of economic activity in Germany suggest that it held up better between March and May than it did in France, Italy or Spain. That may be because of its heavy reliance on manufacturing, where maintaining both output and a social distance is easier than, say, in retail or hospitality services. Capital Economics, a consultancy, argues that Poland will experience Europe’s smallest contraction in gdp this year in part because it relies little on foreign tourists.

The stringency of official lockdowns, and changes to people’s behaviour, has clearly played a huge role. Research by Goldman Sachs, a bank, finds that lockdown stringency—in terms of both the strength of official rules and how enthusiastically people practised social distancing—is strongly correlated with the hit to economic activity, as measured by surveys. By this measure, Italy had the tightest lockdown for the most time (see chart above). A back-of-the-envelope calculation suggests that its gdp for the first half of 2020 is likely to come in about 10% lower than it would have been otherwise—a lot of ground to make up for a country that struggled to grow even before the pandemic. By contrast, South Korea’s GDP looks likely to fall by 5%.

Real-time activity data suggest that America and Spain are laggards, not only in terms of visits to restaurants but also to workplaces and public-transport stations. Others are powering ahead. By the end of June, economic life in Denmark and Norway had pretty much returned to normal. Danish retail sales rose by more than 6% year-on-year in May (compared with a double-digit decline in Britain). Germany’s restaurants were closed in May. But in recent days they have returned to full capacity.


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There are two possible alternatives/ outcomes to the future i.e. the good scenario and the bad scenario.

The good scenario of a more rapid economic recovery would come to pass if the massive worldwide scientific race to develop a vaccine or other medical treatments produces early and scalable results and reduces the need for social distancing faster than expected. However, even for the experts it is virtually impossible to make confident predictions on when effective medical cures will be available.

The bad economic scenario of a much slower recovery or even a double-dip recession would most likely result from strong and widespread second waves of COVID-19 infections that lead to renewed government-mandated or voluntary interruptions of economic activity. History and common sense suggest that second pandemic waves are the norm rather than the exception. Parts of Asia and, more recently, some regions in Europe and the U.S. have already seen a re-acceleration in new infections as mobility and activity have picked up. However, how widespread and strong such second waves will be remains a guessing game – another example of “radical uncertainty” at work.



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