COVID-19: implications for performance and portfolio positioning
The market shock we’re currently experiencing was triggered by a ‘black swan’ event: a health emergency. Unlike the 2008-09 GFC and most others that preceded it, the current crisis originated outside the economic and financial system; a concomitant Saudi Arabia-led oil price war has added to the shockwaves. However, the antecedents of the current turmoil in markets are, yet again, to be found in excesses and dislocations within our economic and financial system.
The COVID-19 pandemic is unchartered territory. There are many unknowns. But we know enough to understand that the unknowns are unlikely to be resolved quickly. Uncertainty looks set to be the dominant feature of this pandemic for some time.
We know it will be difficult to contain the spread of the virus, even if the eventual duration, severity and human cost cannot be estimated at the moment. We know it will be difficult to contain the economic and financial contagion triggered by the pandemic, even if the duration, severity and economic cost of such contagion cannot be estimated at the moment.
We know social distancing and other measures aimed at containing the spread of the virus are creating a combination of supply and demand-side pressures that will damage growth and corporate profits; many economists are now predicting a global recession, disinflation or even deflation. We know that at some stage in the coming months the sharp shock of the pandemic we are currently feeling will fade. The question is how much economic damage could be done before it does, and how short-lived or lasting the fundamental impacts might be.
In short, what originated as a health emergency has quickly evolved into an economic and financial crisis with some features of previous financial crises: widening credit spreads, looming cash shortages, worries about the resilience of banks and high yield funds, precipitous declines in stock markets, and a significant rotation out of risk assets in general.