After falling 34% from their peak this year, global equities (as measured by the MSCI All Country World Index) bottomed-out on 23 March. At the time of writing, they had since rallied 25%. Investors returned on signs that the coronavirus outbreak may be peaking after a slowing in daily new cases in epicentres like Italy and New York.
Equities were also lifted after the Fed (and other central banks) stepped-up their asset purchases (Quantitative Easing) and governments around the world unveiled record stimulus programs.
Crucially, governments and central banks are working together to ensure funding flows to the private sector during the lockdown. For example, the $2.3trn US Coronavirus, Aid, Relief, and Economic Security Act (the ’CARES’ Act) stimulus package includes unprecedented US Treasury-Federal Reserve co-operation. Essentially, the US Treasury will allocate $454bn to the Fed who can multiply this capital by up to 10 times to provide credit worth around $4.5trn for firms, municipalities and funding support for the corporate bond market.
This ‘state capitalism’ of injecting money into the economy has ensured there is ample liquidity flowing through the financial system. Indeed, US broad M2 money supply (e.g. currency in circulation and bank deposits), a rough proxy of the stock of money in the financial system, is expanding by over 18% a year, the fastest pace since the Second World War. The hope is that this largesse also helps support other credit markets.
Despite the improving funding environment, the underlying picture for global growth looks gloomy. For instance, China, the first major economy to release output data, saw its real GDP contract 6.8% in the first quarter, the biggest decline seen in over 30 years of available data.
For the 2020 calendar year, the IMF’s latest economic projections see a 3% decline in global GDP, its worst performance since the Great Depression more than 90 years ago. GDP contractions have led analysts to revise down global Earnings Per Share to -12% for 2020 so far.
If equities are to sustain their recent rally over the longer term, there needs to be a fundamental improvement in growth. For that to happen governments need to ease back on lockdowns. This is starting to happen.
In Germany, small shops and car dealerships (an important industry for the country) resumed business from 20 April, while schools for older children are due to reopen on 3 May.
According to a Sunday Times report, the UK government may start a partial reopening of the economy from 11 May. And President Trump, with an eye to the upcoming election in November, is upping the pressure on state governors to loosen the lockdown.
A V-shaped economic recovery will only be possible if restrictions are lifted and soon. However, there is the ever-present risk that a second coronavirus wave stalls this re-opening…..
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