Market Insights – March 23, 2020

Each week, a team of experts shares its market views with you.

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US stock-market volatility, as measured by the VIX index, reached levels not seen since the 2008 financial crisis. This shows that investors are extremely anxious about the current situation and the prospect of a recession in the USA. It also suggests that markets may now stabilise after the very sharp correction this month.

Given the lack of visibility, and out of caution, several Swiss companies, such as Sonova and Swiss Re, have put their share buyback programmes on hold. Not only has this had an immediate negative impact on EPS growth, but it has also sparked fears of potential dividend cuts. That explains the recent bout of weakness among certain high-yield stocks like insurance companies.

The Bank of Japan also took steps to calm the stock market. It doubled its target for annual purchases of ETFs to JPY 12 trillion, which equates to about USD 9 billion a month. This move helped to buoy the Tokyo Stock Exchange during a week of high market volatility.

Are the authorities ready to do "whatever it takes" to stop the crisis ?

In July 2012, it took just those few words from the then-president of the European Central Bank (ECB) to ease a financial crisis that had been going on for months. At the time, monetary union was hanging in the balance because of the eurozone sovereign debt crisis. The COVID-19 epidemic has first and foremost caused a health crisis. But in recent weeks, the measures taken by governments in developed countries to drastically reduce people’s movements and even confine the population have transformed the pandemic into an economic crisis. After the stock markets took a nosedive, the panic spread to the bond markets, where interest rates have risen sharply on lower-quality paper such as corporates, emerging-market debt and peripheral eurozone debt. This is a worrying trend, and it is crucial for calm to return to the bond markets so that they run smoothly – that will help to minimise the economic impact of this crisis and prevent it from becoming a financial crisis as well. Clearly, words alone are no longer enough. Aware of what is at stake, the ECB and the US Federal Reserve have injected large amounts of liquidity into their respective economies. And around the world, both central banks and governments have taken action. Discussions about fiscal stimulus are now under way, led by Europe and the USA. And the figures being mentioned are dizzyingly high. Central banks will inject hundreds of billions into their economies, while governments are planning sweeping stimulus plans. In the USA, for instance, a package of close to USD 2 trillion is currently being debated in Congress. These major announcements in response to the health, economic and financial crises should gradually bring calm to the financial markets, especially since both central banks and governments have said they will take further steps if needed. Around the globe, Mario Draghi’s 2012 statement resonates now more than ever. Volatility could remain very high in the short term. But if central banks manage to seal the recent cracks in the bond markets, stock markets should soon bottom out. Given the extent of the measures announced and the sums involved, the markets should pick up quite quickly once the worst of the epidemic is behind us in Europe and the USA.

Europe – whatever it takes 2.0 ?

As the number of cases drops in China, Europe has become the epicentre of the pandemic, and the situation in Italy and Spain is extremely concerning. Initially, political leaders in Europe were slow to react and underestimated the extent of the danger.  They are now well aware not only that coronavirus is a very serious health threat, but that it will also strike a major economic blow – one that could be similar in scope to that caused by the 2008 financial crisis if nothing is done about it. The ECB’s initial response was deemed insufficient by the markets. But the new EUR 750 billion emergency plan, and Christine Lagarde’s statement that the ECB “will do everything necessary within its mandate” is massive. So far, the fiscal response from national governments has been timid. But a coordinated eurozone-wide response would no doubt be a game-changer for the region’s economy.

The outbreak has brought panic to the eurozone’s stock markets. They are clearly now oversold and investor sentiment is extremely bearish. In the short term, markets are likely to remain volatile until investors have fully priced in the virus’s future spread and its impact on economic activity and on earnings. However, for those taking a long-term approach, we think there are now opportunities worth seizing, especially among top-tier companies like L’Oréal and Danone.


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