Coronavirus: 30 March investment update

In terms of central bank activity, the biggest announcement came from the Federal Reserve (Fed) when they announced before the market opened on Monday 23 March that they would buy unlimited US treasuries and agency mortgage backed securities. Later that day, they also – perhaps more importantly – announced they would support the corporate bond market. They now have the ability to buy investment grade bonds both in the newly issued market and secondary market among existing investors.

In terms of government policy:

• The US Congress approved a fiscal package worth US$2 trillion, which is around 10% of GDP, and features support for household incomes via direct transfers, expansion of unemployment benefits, loans to small businesses, as well as funds to help businesses.
• In Europe, Germany announced a €800bn crisis spending package.
• The UK government pledged support for the self-employed impacted by the virus – a package that was in line with the previous announcement aimed at company employees.

These cash flow ‘bridges’ for both businesses and households aim to provide a positive news flow given we are starting to see the impact of the shutdown in economic data releases. For example, last week’s filing saw US unemployment benefit claimants surge to a record 3.3m last week, up from 282,000 the previous week. This is more than four times the previous 1982 record high of 695,000.

What is now beginning to occupy minds is the length of the shutdowns – information which is key in determining the overall impact on economic growth and therefore asset prices. After all, until companies know what their future cash flows are, markets cannot know how to discount those cash flows and place a value on assets. This remains a challenge given the lack of a global medical policy and medical innovation.

Different countries are taking different medical advice on the best way of bringing the virus under control, which could result in widely divergent outcomes; for example, if a country shuts down too late…or opens up too quickly. Different countries’ populations are also responding differently to government policy.

Testing is extremely important, both to establish the number of infected and to ascertain who has had COVID-19 and may have developed immunity. If governments can assess if a part of the population has some form of immunity, it could speed up the process of reopening that country’s economy.

In the immediate term, the focus is on increasing hospital capacity and equipment, not only to deal with the peak in the number of cases, but also to create a level of comfort that future cases can be dealt with and therefore allow people back to work quicker.

The silver bullet remains the introduction of a vaccine ….but this will take time. In the interim, however, an existing drug or technique could be used to reduce/help symptoms e.g. last week the US Food and Drug Administration announced that they will soon allow doctors to treat coronavirus patients with plasma donated by those who have survived the virus – a technique that was used on some patients during the 2002-3 SARS outbreak.