SINGAPORE (Mar 27): The biggest hit to the global economy comes not from the virus itself but from the escalating restrictive movement measures imposed by governments. “Social distancing” is probably among the most repeated phrases these days, along with “stay at home” and “shelter in place”, and words such as “quarantine” and “lockdown”.
Many market observers are fretting over a global recession or, worse, depression. Certainly, upcoming economic indicators will be very, very bad, but not very meaningful in the current environment. The radical containment measures affect both the demand and supply sides in the economic equation. Manufacturing is down sharply because almost all production output is halted, save for essential goods. Plants are lying idle as employees are forced to stay home. Every bottleneck will mean cascading disruptions for the entire supply chain.
The services sector is similarly severely affected as demand collapses. Retail outlets, malls, bars, clubs, restaurants, theatres, gyms and others have all been ordered to shutter. Local and international travel is grinding to a near stop. Of course, GDP — which is a measure of economic activities — will contract sharply. We engineered it, indeed made all efforts to ensure this will be so.
The economic cost will be massive, but there is no other viable choice. We have to do everything possible to contain-mitigate the outbreak — and swiftly — to break the chain of contagion. This will buy time, to avoid swamping healthcare systems and for the world to find a cure and vaccine. What governments need to do now, without delay, is to ensure there is minimal permanent damage to the underlying economy. That means providing cash flow to businesses, big and small – to keep the lights on and prevent massive layoffs – and to households, to tide them over during this period and so that consumption can recover once the outbreak ends.
Positively, most countries are cognisant of this need. Fiscal spending is making a huge comeback and is larger than that implemented during the global financial crisis. The US just unveiled a fiscal package worth US$2 trillion ($2.9 trillion). Even Germany, the poster child for fiscal restraint, plans to spend big. What were fringe policies suchas sending money directly to the people — economists call this helicopter money — are gaining widespread support.
Central banks are pouring a massive amount of liquidity into the banking and financial systems. They have rolled out all the measures that were implemented during the global financial crisis — and beyond. And not in dribs and drabs as they did in the last crisis, either. Case in point: This past week, the US Federal Reserve announced that it would buy an unlimited amount of Treasury-mortgage securities and be a lender of last resort to small and large businesses as well as local governments, bypassing financial intermediaries.
To be sure, markets are not responding, beyond a day or two, yet. Why? It is impossible to quantify the unknown. How long will the containment measures last, when will the pandemic peak, how many will lose their jobs, how badly will corporate earnings and economic growth be hurt, which businesses will never reopen and which jobs lost that will never come back?
None of these questions can be answered until the spread of the coronavirus is arrested. Only when the outbreak is contained can we remove the uncertainties and assess the damage. If all the fiscal and monetary measures are in place, when we finally get good news on the virus front, the economy will start to recover. Stock markets will rebound.
Until then, historical performance is largely irrelevant. For example, both Adobe and Lennar reported robust earnings in the last quarter, but still saw their share price plummet. More on this later. For investors, if ever there was a time to emphasise that balance sheet matters, it is now.
The situation in China is cause for hope. It was the initial epicentre of the pandemic. The government acted quickly to implement robust quarantine measures and aggressively tracked down potential cases for testing and insolation. Four months since the first confirmed case, the country last week reported zero new local cases, though there continues to be imported ones. The latter underscores how critical it is that the entire world has to successfully contain the virus for a sustained economic recovery process to begin.
Manufacturing in China is slowly regaining production capacity, though services are lagging as concerns linger. A deputy governor at the People’s Bank of China said he expected significant improvement ineconomic indicators in the second quarter.
Hormel Foods, the consumer staples producer of brands such as Spam and Skippy peanut butter, operates three manufacturing facilities in China. Its CEO said in a recent interview, “There’s actually a return to normalcy and so our plants are fully staffed … What we’re hearing just out and about is that people are in the communities, our retail business is strong and the food service business is really starting to bounce back.”
Lennar reported blowout quarterly earnings on March 19, with deliveries and new orders of homes up 17% and 20% respectively. Revenue grew 15% y-o-y while earnings per share went up a whopping 72%. New orders during the quarter were higher by 18% y-o-y. But none of these numbers matters to investors. Despite entering the crisis on a strong positive momentum, the US housing market will slump in the near term as home sales and construction activities fall sharply, owing to the restrictive movement measures. Potential buyers will be hesitant to make any major commitment without better clarity on the economy and job security, as will lenders.
Whether there will be more permanent damage depends on when the outbreak can be brought under control. We believe the housing market will prove to be resilient and will bounce back.
The secular trends of rising first-time millennial home buyers and lower-for longer interest rates are intact. US consumers spent much of the last decade repairing their balance sheets after the bursting of the housing bubble that preceded the Great Recession. Household debt and debt servicing ratios are well below levels during the last financial crisis and consumers were saving a much higher percentage of their disposable incomes (see Charts 1 to 3).
In short, households are in fairly good shape and housing demand should bounce back quickly — unless the containment-mitigation efforts fail, and the outbreak drags on and results in sustained high unemployment, which could then lead to foreclosures and house price collapse.
The Global Portfolio recovered some lost ground, up 8.3% for the week ended March 26, after suffering steep losses in the previous week. Shares in Lennar, Builders FirstSource and The Boeing Co registered the biggest rebounds. Last week’s gains pared total portfolio losses since inception to 9%. By comparison, the benchmark MSCI World Net Return Index is down 11.4% over the same period.
Tong Kooi Ong is the chairman of The Edge Media Group, which owns The Edge Singapore.
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