‘Fed up’ would be an understatement for the sizeable chunk of humanity locked down for weeks on end, but fortunately there is now room for hope. Cautious they may be, but more or less simultaneous announcements from many countries about easing restrictions are starting to lift all our spirits. Covid-19 has hardly disappeared, but we appear collectively to have ‘flattened the curve’ enough to ensure that health systems can at least cope with it.
Desperate research aimed at miracle drugs that could either treat the illness or vaccinate against it has yet to bear fruit. Governments are therefore resigned to re-exposing people to the virus and wing it from there. The lack of reliable statistical tools is a major handicap; we still do not have a proper calculation of the mortality rate as a proportion of infected individuals (the infection fatality rate, or IFR), relying instead on the completely unsatisfactory denominator of tested individuals. The ratio of infected to tested individuals could be as high as 50:1. A mishmash of analyses covering situations as disparate as the town of Gangelt in Germany to the Diamond Princess cruise ship suggests an IFR of between 0.15% and 0.60%, well below the 7% we obtain when we use detected cases. If we assume that 60% of us will end up being infected at some point or other, those IFRs give us between 54,000 and 108,000 deaths in France, for example, concentrated among the more vulnerable part of the population. Unless a remedy comes along sooner, of course. Sweden has opted for a head-on approach, leaving bars and restaurants open while taking a number of sensible precautions. According to the authorities, Stockholm will soon be immune to further outbreaks. Germany has grasped the statistical problem at last, establishing three representative panels (one national panel of 15,000 people). This ought to answer some of the questions that the scientists and politicians have been asking.
Equity markets believe that lockdowns will do the trick eventually. Together with massive liquidity injections, this sentiment has lifted the S&P 500 27% off its lows. It is now just 11.7% down on the year following its 31.5% gain in 2019; in the meantime, the VIX has dropped sharply. Eurozone markets are suffering rather more, reflecting the weights of banks and oil companies in the main indices. Unsurprisingly, healthcare and IT stocks are performing the best. New GDP growth estimates for 2020 are starting to appear, and we are looking at a 5-10% drop worldwide. China is estimated at +2%. We have to go back to the Great Depression to see anything similar. US unemployment has surged by 26 million in a matter of weeks, and while they are receiving payouts right now it is unclear how long that can last.
Frantic efforts to print money worldwide have meant ballooning central bank balance sheets. The overall increase is measured in trillions of dollars, with the Federal Reserve accounting for
[.5 trillion all on its own. The Fed and the ECB are also buying up junk bonds to keep credit markets open. While budgetary stimulus is the order of the day, the euro zone has less room for manoeuvre than the USA. The 19 eurozone countries do not have the same interests, and Italy is not in a position to issue much more debt (much of which is bought by the ECB anyway). It would rather see ‘coronabonds’ being issued instead. The EU has voted a €540 billion package, and for once the European Commission is pushing for trillions rather than billions for this purpose. An agreement on additional stimulus would buoy the markets. For the first time, governments are in general resorting to direct financial payments to their people.
On Wall Street, Q1 results announcements are beginning to offer a degree of visibility on 2020 corporate profits. The consensus estimate for the S&P 500 is -18%, but we are using -34% with a 34% rebound in 2021. Our forecasting model gives us an 8-year -0.2%, which is a prudent number between two cycle highs. Our year-end price objective is up slightly to 3,092 points and we are sticking to the overweight recommendation we adopted last month, with caution above 2,940 points. Our objective for the MSCI EMU is 112 points, compared with last Friday’s close at 100 points.
We wish all our readers good health and a swift exit from the crisis.
