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Video: How is coronavirus impacting the global economy?

Rathbone’s strategist Edward Smith talks to Emma Wall about how coronavirus is impacting growth in developed and emerging markets, and the green shoots he is looking to identify for a positive outlook.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • The central bank policy response has been mixed around the world, resulting in differing economic impact.
  • China has not recovered as quickly as economists were expecting.
  • Some of the most fragile economies have seen the highest number of coronavirus cases.


Transcript

Emma Wall and Edward Smith face their cameras as they videocall from home.

Emma: Hi I'm Emma Wall and joining me today to talk about the economic impact of coronavirus is Rathbone's Ed Smith. Hi Ed.

Ed: Hi Emma.

Emma: So of course this is a pandemic which means it's global in its nature but it has impacted the economies of the world differently dependent on the economic situation they were in before coronavirus hit and indeed the way they’ve responded to the virus.

I thought we could start by looking at emerging markets and the way in which coronavirus has impacted economies in those regions.

Ed: Sure, so what we're seeing at the moment is a series of rolling peaks in new cases of coronavirus around the world.

The reason that hasn't peaked yet is Asia and Latin America and we're seeing a surge in new cases each day - in Brazil, in Mexico, in Indonesia, in Russia. That's very concerning because this is a global pandemic, we need to see a peak in all regions of the world.

We're concerned about how emerging markets may handle this pandemic.

Some central banks have started to follow the lead of the Federal Reserve or ECB and start QE (Quantitative Easing). But, of course do they have the institutions, do they have the independence that would mean investors don’t get worried that we're about to go into some sort of spiral of Central Bank Funded spending that could cause hyperinflation that we’ve seen.

Some emerging market fiscal policies, like the UK, trying to put money into peoples bank accounts displaced by the virus. But again that's much harder in emerging markets, when in some of these instances 50% of people don't have a bank account.

So it is a lot more difficult given the institutions, given the financial architecture for emerging markets to respond well. And again thinking about investment markets and equity markets we're a little bit concerned that investors have become a bit complacent about the ability for earnings to grow in Asia. So we're a little concerned.

Emma: And what about some of those emerging markets (I’m thinking in particular of China) which are ahead of us I suppose in the curve? Because you have started to see restrictions lifted in China. Is it too soon to get some sort of economic data out of that region? Or can we use what’s happening there to extrapolate out what we can expect to see in terms of a recovery when we do get past our peak?

Ed: There's some good high frequency data that's very useful and could serve as a roadmap for the rest of the world.

I think the main lesson that we've learned so far is that expectations of normalisation keep being disappointed. A lot of economists, a lot of China-watchers, myself included, had sort of thought it looked as though China was going to get back to pretty much full operational capacity around about now. But there’s still some pretty large gaps in certain sectors. Shopping malls for example they’re about 90% open but actually only about 50-70% full in terms of people coming through their doors.

Again, not all industrial sectors are back to full operating capacity - they’ve made good progress, don’t get me wrong - but this might take a little longer to recover from, than perhaps some of the most optimistic commentators are suggesting.

Emma: Why is it that we haven't seen that bounce back that was expected?

Is it because of sort of a shift in societal behaviour? Or is it because some of the Chinese economy is still so linked to the rest of the world which of course is still very much in the fore of what's going on?

Ed: I think that's certainly a huge part of it.

If you look at business surveys and the components that measure new export orders they're still really down in the dumps whereas other components of those surveys which look more domestically have recovered more strongly.

So I think certainly China and other emerging markets that are perhaps ahead of the rest of the world (like South Korea) are slamming into the constraints of global demand.

I think what we’re also seeing in China is that still, so people go home for Chinese New Year. They work in the city and go back to their home in interior cities, or in the countryside. Still a lot of them don’t look as though they have returned. Now I'm not sure quite why that is, but it could well be some of it to do with psychology – they're too scared to go back to the city even though that's where their jobs are.

Emma: What about developed markets then? Again not a group but what are we seeing in terms of economic impact of coronavirus for developed markets?

Ed: Sure, well I think it's unfortunate that some of the most fragile economies have suffered from the virus to a greater extent. Italy for example, even the UK where growth over the last few years has been very weak, again the UK has suffered worse than some other regions.

It’s very much not a homogeneous group; and it’s not a homogeneous group policy wise either. We’ve seen huge efforts in Germany, the US, in Canada - less so in Italy and Spain where perhaps its needed more. We're a little concerned about the UK's policy response.

So in the US they've gone for the approach of not trying to save jobs but replace income when those jobs are lost by incredibly generous transfer payments. They’re also keeping firms liquid and solvent so they can rehire when we're out of this mess.

The UK has tried to keep firms from firing people at all by these furlough schemes. We're a little concerned that that's not working quite so well. An unusual amount, an unexpected amount of universal credit claims and we're a bit concerned the UK might come out of this a little weaker than perhaps some of the stronger developed markets.

Emma: When you say a little weaker, I suppose there's always the argument that the stock market (after so many years of growth) was due a correction anyway. And that there were significant headwinds, demographics, AI, to global growth or growth in developed markets too.

How do you extrapolate out what the underlying sort of trends to both economic growth and a stock market correction versus the impact of coronavirus? And then how do you put that into your outlooks going forward?

Ed: Sure, I mean certainly the expansion and the bull market was getting a little long in the tooth but we weren't seeing the signs yet (apart from maybe some extended valuations) that would have been consistent with a bear market starting so we think this is largely about coronavirus.

Interestingly we've seen those sectors and companies that had the highest valuations going into this still have the highest valuations today.

So yeah a lot of those high valuations which looked a bit sort of eye-watering look really quite justified particularly the software and communication services sectors. Companies with good structural growth stories, quality balance-sheets, low leverage, they have all looked very expensive but they're still expensive today – you probably should have carried on owning them.

I think the lesson is, yet again, as it was in 2008-2009; leverage, low levels of cash and poor earnings visibility is not your friend.

Emma: And for the investor sitting here today, trying to navigate the market now what are the indicators you're looking for, as a strategist, to say okay things might be beginning to look better now?

Ed: Yeah I mean, the strategist’s job is so difficult at the moment. We've got economic uncertainty, policy uncertainty, epidemiological uncertainty - and I'm certainly not qualified to comment on the latter!

I think what we're looking at for now is some of the high-frequency indicators for signs of normalisation.

Now everyone's writing off the second quarter, we know that's going to be horrible, but we do need to see some green shoots coming towards the end of that quarter so that we can get a better handle on what it’s going to look like in the second half of the year.

So we're looking at things like Google and Apple's ability trends (which we get free from their websites), things like daily shipping data and traffic data. These indicators that were available before but we tended not to look at them because we were too staid in our approach.

So we need to concentrate on that, see signs of green shoots and also watch corporate failures because a short recession should definitely see some people fail, some companies will fail. There will be defaults but there shouldn't be so many that it risks long-term unemployment.

If we get a much greater number of corporate defaults than you usually associate with a short recession then there are some larger downside risks coming to the fore.

Emma: Ed, thank you very much.

Ed: Thanks Emma.


This video and any comment on individual companies is not personal advice or a recommendation to invest. If you are unsure about the suitability of an investment please seek advice. Investments and their income can fall as well as rise in value and you could get back less than you invest. Yields are variable and are not a reliable indicator of future income. Past performance is not a guide to the future.

The views in this video are those of Ed Smith and may not be shared by Hargreaves Lansdown. Investing in emerging markets is higher risk.

Views correct as at 12 May 2020.



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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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