The global public health crisis caused by the new crown pneumonia epidemic may be turning into a global economic recession, and the risk of triggering the financial crisis is also rising
creative design/Li Li
article | Kang Juan Zhang Xiaotian
editor | Kang Juan
"Hope will always be there, but false hope may bring high costs." Barron's magazine said in a cover article in early 2020.
In the past two months, with the spread of the new crown pneumonia epidemic around the world, concerns about the severity of the pandemic and the economic impact have deepened. March 2020 is a month that is enough to be recorded in financial history. US stock experienced a panic selling of four circuit breakers in 10 days. In February before that, the 11-year US stock bull market was still setting new highs. The plunge in US stocks is "a historic fluctuation that should not have occurred in the lifetime of the earth." This is a comment made by Hong Hao, chief strategist of BOCOM International, after the Dow Jones Index fell 13% on March 16. As of the first quarter of this year, the Dow Jones Industrial Average fell 23.2%, while the S&P fell 20%, both of which hit the largest first-quarter decline in history. When the financial market was shaking, the Federal Reserve quickly announced a loose policy of space. Since then, dozens of central banks have announced interest rate cuts, and the response speed and scale have exceeded that of the 2008 financial crisis. With the combined stimulus policies and expectations that oil-producing countries may reach a production cut agreement, US stocks have rebounded by more than 20% from their recent lows, entering a technical bull market. The Panic Index VIX, which measures the future volatility of the S&P 500 Index, continued to fall from a high of 82.69 set on March 16 to 41.67 on April 9.
's stormy decline seems to have come to an end for the time being. But, has the stock market really bottomed out?
There is a saying in English, "Bad Things Come in Threes". The global public health crisis triggered by the COVID-19 epidemic may be turning into a global economic recession. Although the financial crisis has not yet been triggered, this risk is also rising. This means that we need to be prepared to fight at the same time on these three fronts. Market participants warn that a second wave of decline may still occur. In this case, watching carefully the signal of the epidemic improving will remain the investment tone in the next few months. But for brave long-term investors, it may be possible to start looking for buying opportunities.
Economic prospects: V-shaped, U-shaped or L-shaped? One important reason why investors have paniced in the past month is that people cannot know exactly how big the impact the epidemic has caused on major economies and even global growth. The pandemic has caused corporate incomes to quickly dry up and unemployment rates to soar. As the latest economic data of China, the United States and other countries are released one after another, investors have begun to realize that the impact of the epidemic on the economy has even exceeded some people's initial expectations.
"This is an unprecedented crisis." Georgieva, president of the International Monetary Fund (IMF), said on April 3, "We have witnessed the world economy stagnation. We are now in recession. This is much worse than the global financial crisis from 2008 to 2009."
In the United States, since the so-called "inversion" phenomenon occurred in the 2019 Treasury yield curve, concerns about the US economic recession have not stopped. But the recession theory was soon covered up by the bullish US stock market and the unemployment rate with a 50-year historical status, although investors knew that the momentum of the stock market came from the federal tax cuts and the Federal Reserve's interest rate cuts, not the performance of physical enterprises. The sudden black swan event of
has directly changed the topic of discussion between economists from "will the US economy fall into recession" to "what degree of recession will occur in the US economy."
In the three weeks ended April 4, the total number of people applying for unemployment benefits in the United States reached 16 million. The non-farm employment data for March released on April 3 showed that the unemployment rate was 4.4% that month, a sharp increase from 3.5% in February and far higher than the 3.8% estimate. Market insiders pointed out that from a trend perspective, the US unemployment rate in April is likely to break through 10%.
Minutes of the Federal Reserve's policy meeting on March 15 released by the Federal Reserve on April 8 show that when the Federal Reserve held an emergency meeting and decided to lower the interest rate range to zero and launch a quantitative easing plan of $700 billion, it is clear that the United States is facing a sharp deterioration and extremely uncertain economic prospects and will "maintain zero interest rate levels until the end of the epidemic." The worst expectation of the economy by Fed economists is that they will not recover until next year.
At the beginning of the epidemic, people believe that the growth of economies such as the United States will show a "V" trend, that is, generally optimistic about the rapid rebound after a sharp short-term impact. But as the huge impact of the epidemic gradually emerges, this expectation has also begun to shake. Investment banking economists generally predict that the US GDP will see its worst decline since 1947 in the second quarter.
Goldman Sachs 's prediction is relatively pessimistic. On March 31, Goldman Sachs chief economist Jan Hatzius lowered his annualized quarterly GDP growth rate for the first and second quarters of the United States to -9% and -34%, respectively, compared with -6% and -24%, respectively. The unemployment forecast for the mid-year period also rose to 15% from 9% before.
Deutsche Bank believes that given the essential "sudden suspension" of economic activities, consumers may be even less willing to resume normal activities within a period of time. "Since workers are separated from businesses and companies remain the same cautious when reevaluating basic needs, it may be difficult to rematch workers and businesses. More importantly, when domestic containment measures begin to be eliminated, global travel and supply chains may remain in chaos for some time." The trillions of dollars spent by
to survive this crisis may not necessarily produce matching results. Chris Senyek, strategist at Wolfe Research, said that if spending per dollar can be converted into 50 cents of GDP growth, the effect can be said to be "amazingly good." "However, we are not optimistic about the ability of fiscal plans to stimulate GDP growth," he said.
As the first country to control the spread of the epidemic, China's economic data has also been referenced by many market participants. "Barron's" article on March 27 analyzed that China was the first to be hit by the epidemic, which means that its economic data can provide some reference for what may happen in the United States.
In the first two months of 2020, China (except state-owned enterprises) industrial output fell by 20% year-on-year, and retail sales also fell by 20%. Service consumption fell by 13%, residential construction fell by 15%, and corporate investment fell by 25%. Based on this analysis, if the United States suffers a similar impact, national income before mid-year will decline by about 16% compared with the end of 2019. Unless revenue recovers quickly, losses will be significantly more than $3 trillion. This is very likely to cause tens of millions of people to lose their jobs.
However, unlike China where it is quarantined first and then gradually returned to normal, the epidemic is still uncontrollable in the United States and most parts of Europe, and almost no testing and isolation measures are taken. If Americans resume social contact prematurely, the situation will only get worse. Before a vaccine is available at the end of next year, the United States may face an intensified downward trend rather than a rebound after a sharp downward trend.
In this case, it is more suitable for reference not the whole country of China, but the Hubei Province where Wuhan is located. Before Italy's Lombardy and New York, Hubei was the worst-hit region in the world, and its economy was even worse. Hubei Province's industrial output fell sharply by 46% compared with the beginning of last year, and residential construction fell by nearly 70%. The article points out that if the United States suffers a situation similar to that of Hubei Province, its revenue losses may be closer to $10 trillion.
Hazhesi pointed out in a research report on March 24 that if the growth rate is looked at, the recovery may appear as a "V" shape, but if the economic activity is looked at, the recovery may appear as a "U" shape. According to Goldman Sachs' forecast, it will take about a year for most of the disturbed economic activities to return to normal; but in fact, some industries may be permanently damaged, such as the cruise industry.
But this is not the worst situation. Pacific Investment Management Corporation (PIMCO)'s "Cyclical Outlook Report" on April 7 stated that the basic expectation of PIMCO is still a "U"-shaped recovery. However, if the epidemic lasts longer than expected, or the corporate default rate is higher than expected, there are two downside risks: one is the extended "L"-shaped trajectory, and the other is the recovery is interrupted by the recurrence of the epidemic, and the second bottoming out is W-shaped.
Michelle Meyer, head of the securities economic department of Bank of America, predicted in mid-March that the US economy may face long-term stagnation, which may lead to a more "L"-shaped recovery in the US economy, that is, it will take more time to recover.
So is the current economic recession in the United States so severe that it is the second Great Depression? Although there is no clear definition of the Great Depression, the San Francisco Federal Reserve Bank attempts to examine this issue by comparing the economic recession between 1973 and 1975 with the first downward phase of the Great Depression between 1929 and 1933.
In the 1973 recession, GDP fell by 3.4%, while the unemployment rate rose from 4% to 9%. In the first phase of the Great Depression, which began in 1929, real output fell by nearly 30%, while the unemployment rate jumped from 3% to nearly 25%. In the late stages of that terrible recession, many businesses and individuals went bankrupt. Banks went bankrupt and the economy took more than 10 years - and a world war - to recover. It took the stock market 25 years (until 1954) to return to its peak level in 1929.
Financial Crisis: Focus on emerging markets, corporate bonds and banking systems
Although the global public health crisis triggered by the COVID-19 epidemic is likely to have led to economic recessions in many countries, it has not triggered the financial crisis so far. Financial institutions are more resilient than the financial tsunami period more than ten years ago. Thanks to the relief policies of various countries, the market panic is significantly alleviating.
Nomura Securities believes that the measures taken by central banks and governments may not help curb the virus, and the virus has its own patterns of change. However, "the unprecedented scale of global policy measures we have seen so far will ensure that the financial system does not collapse."
Financial crisis usually occurs when asset prices are high (such as stock markets after a decade of bull market), or when there is too much debt in the financial system (such as after years of high borrowing with low interest rates). Sometimes a severe recession can itself endanger financial stability, as rising unemployment and falling economic output can trigger a wave of defaults that will damage banks' health. Fortunately, this time, policy makers learned from 2008 and took action earlier and more actively.
Barron's magazine believes that economic activity in most parts of the world has stalled, and it is not clear how many companies and countries will be forced to default. Although there is no obvious sign that a financial crisis has occurred, such a crisis may be more destructive once it occurs, as the financial crisis threatens the flow of capital in the economy and spreads to the entire financial system. Three key areas of emerging markets, U.S. corporate bonds, and the banking system itself need to be closely monitored.
—Emerging markets
International Financial Association (IIF) data shows that in the 70 days starting from January 21, about US$92.5 billion in securities investments held by non-residents flowed out of emerging markets, and the outflow rate was faster than during similar events such as the financial crisis.
Independent research firm Capital Economics warned that emerging markets could experience a round of sovereign debt defaults. As borrowing costs soar, countries like Ecuador , Argentina and Zambia are under tremendous pressure. Other countries may also be in trouble. Robin Brooks, chief economist at the Institute of International Finance, said that for example, South Africa's currency is seriously overvalued, has a serious imbalance in the balance of payments, has a long-term current account deficit, and economic growth is also negative.
The global public health crisis caused by the new crown pneumonia epidemic may be turning into a global economic recession, and the risk of triggering the financial crisis is also rising
creative design/Li Li
article | Kang Juan Zhang Xiaotian
editor | Kang Juan
"Hope will always be there, but false hope may bring high costs." Barron's magazine said in a cover article in early 2020.
In the past two months, with the spread of the new crown pneumonia epidemic around the world, concerns about the severity of the pandemic and the economic impact have deepened. March 2020 is a month that is enough to be recorded in financial history. US stock experienced a panic selling of four circuit breakers in 10 days. In February before that, the 11-year US stock bull market was still setting new highs. The plunge in US stocks is "a historic fluctuation that should not have occurred in the lifetime of the earth." This is a comment made by Hong Hao, chief strategist of BOCOM International, after the Dow Jones Index fell 13% on March 16. As of the first quarter of this year, the Dow Jones Industrial Average fell 23.2%, while the S&P fell 20%, both of which hit the largest first-quarter decline in history. When the financial market was shaking, the Federal Reserve quickly announced a loose policy of space. Since then, dozens of central banks have announced interest rate cuts, and the response speed and scale have exceeded that of the 2008 financial crisis. With the combined stimulus policies and expectations that oil-producing countries may reach a production cut agreement, US stocks have rebounded by more than 20% from their recent lows, entering a technical bull market. The Panic Index VIX, which measures the future volatility of the S&P 500 Index, continued to fall from a high of 82.69 set on March 16 to 41.67 on April 9.
's stormy decline seems to have come to an end for the time being. But, has the stock market really bottomed out?
There is a saying in English, "Bad Things Come in Threes". The global public health crisis triggered by the COVID-19 epidemic may be turning into a global economic recession. Although the financial crisis has not yet been triggered, this risk is also rising. This means that we need to be prepared to fight at the same time on these three fronts. Market participants warn that a second wave of decline may still occur. In this case, watching carefully the signal of the epidemic improving will remain the investment tone in the next few months. But for brave long-term investors, it may be possible to start looking for buying opportunities.
Economic prospects: V-shaped, U-shaped or L-shaped? One important reason why investors have paniced in the past month is that people cannot know exactly how big the impact the epidemic has caused on major economies and even global growth. The pandemic has caused corporate incomes to quickly dry up and unemployment rates to soar. As the latest economic data of China, the United States and other countries are released one after another, investors have begun to realize that the impact of the epidemic on the economy has even exceeded some people's initial expectations.
"This is an unprecedented crisis." Georgieva, president of the International Monetary Fund (IMF), said on April 3, "We have witnessed the world economy stagnation. We are now in recession. This is much worse than the global financial crisis from 2008 to 2009."
In the United States, since the so-called "inversion" phenomenon occurred in the 2019 Treasury yield curve, concerns about the US economic recession have not stopped. But the recession theory was soon covered up by the bullish US stock market and the unemployment rate with a 50-year historical status, although investors knew that the momentum of the stock market came from the federal tax cuts and the Federal Reserve's interest rate cuts, not the performance of physical enterprises. The sudden black swan event of
has directly changed the topic of discussion between economists from "will the US economy fall into recession" to "what degree of recession will occur in the US economy."
In the three weeks ended April 4, the total number of people applying for unemployment benefits in the United States reached 16 million. The non-farm employment data for March released on April 3 showed that the unemployment rate was 4.4% that month, a sharp increase from 3.5% in February and far higher than the 3.8% estimate. Market insiders pointed out that from a trend perspective, the US unemployment rate in April is likely to break through 10%.
Minutes of the Federal Reserve's policy meeting on March 15 released by the Federal Reserve on April 8 show that when the Federal Reserve held an emergency meeting and decided to lower the interest rate range to zero and launch a quantitative easing plan of $700 billion, it is clear that the United States is facing a sharp deterioration and extremely uncertain economic prospects and will "maintain zero interest rate levels until the end of the epidemic." The worst expectation of the economy by Fed economists is that they will not recover until next year.
At the beginning of the epidemic, people believe that the growth of economies such as the United States will show a "V" trend, that is, generally optimistic about the rapid rebound after a sharp short-term impact. But as the huge impact of the epidemic gradually emerges, this expectation has also begun to shake. Investment banking economists generally predict that the US GDP will see its worst decline since 1947 in the second quarter.
Goldman Sachs 's prediction is relatively pessimistic. On March 31, Goldman Sachs chief economist Jan Hatzius lowered his annualized quarterly GDP growth rate for the first and second quarters of the United States to -9% and -34%, respectively, compared with -6% and -24%, respectively. The unemployment forecast for the mid-year period also rose to 15% from 9% before.
Deutsche Bank believes that given the essential "sudden suspension" of economic activities, consumers may be even less willing to resume normal activities within a period of time. "Since workers are separated from businesses and companies remain the same cautious when reevaluating basic needs, it may be difficult to rematch workers and businesses. More importantly, when domestic containment measures begin to be eliminated, global travel and supply chains may remain in chaos for some time." The trillions of dollars spent by
to survive this crisis may not necessarily produce matching results. Chris Senyek, strategist at Wolfe Research, said that if spending per dollar can be converted into 50 cents of GDP growth, the effect can be said to be "amazingly good." "However, we are not optimistic about the ability of fiscal plans to stimulate GDP growth," he said.
As the first country to control the spread of the epidemic, China's economic data has also been referenced by many market participants. "Barron's" article on March 27 analyzed that China was the first to be hit by the epidemic, which means that its economic data can provide some reference for what may happen in the United States.
In the first two months of 2020, China (except state-owned enterprises) industrial output fell by 20% year-on-year, and retail sales also fell by 20%. Service consumption fell by 13%, residential construction fell by 15%, and corporate investment fell by 25%. Based on this analysis, if the United States suffers a similar impact, national income before mid-year will decline by about 16% compared with the end of 2019. Unless revenue recovers quickly, losses will be significantly more than $3 trillion. This is very likely to cause tens of millions of people to lose their jobs.
However, unlike China where it is quarantined first and then gradually returned to normal, the epidemic is still uncontrollable in the United States and most parts of Europe, and almost no testing and isolation measures are taken. If Americans resume social contact prematurely, the situation will only get worse. Before a vaccine is available at the end of next year, the United States may face an intensified downward trend rather than a rebound after a sharp downward trend.
In this case, it is more suitable for reference not the whole country of China, but the Hubei Province where Wuhan is located. Before Italy's Lombardy and New York, Hubei was the worst-hit region in the world, and its economy was even worse. Hubei Province's industrial output fell sharply by 46% compared with the beginning of last year, and residential construction fell by nearly 70%. The article points out that if the United States suffers a situation similar to that of Hubei Province, its revenue losses may be closer to $10 trillion.
Hazhesi pointed out in a research report on March 24 that if the growth rate is looked at, the recovery may appear as a "V" shape, but if the economic activity is looked at, the recovery may appear as a "U" shape. According to Goldman Sachs' forecast, it will take about a year for most of the disturbed economic activities to return to normal; but in fact, some industries may be permanently damaged, such as the cruise industry.
But this is not the worst situation. Pacific Investment Management Corporation (PIMCO)'s "Cyclical Outlook Report" on April 7 stated that the basic expectation of PIMCO is still a "U"-shaped recovery. However, if the epidemic lasts longer than expected, or the corporate default rate is higher than expected, there are two downside risks: one is the extended "L"-shaped trajectory, and the other is the recovery is interrupted by the recurrence of the epidemic, and the second bottoming out is W-shaped.
Michelle Meyer, head of the securities economic department of Bank of America, predicted in mid-March that the US economy may face long-term stagnation, which may lead to a more "L"-shaped recovery in the US economy, that is, it will take more time to recover.
So is the current economic recession in the United States so severe that it is the second Great Depression? Although there is no clear definition of the Great Depression, the San Francisco Federal Reserve Bank attempts to examine this issue by comparing the economic recession between 1973 and 1975 with the first downward phase of the Great Depression between 1929 and 1933.
In the 1973 recession, GDP fell by 3.4%, while the unemployment rate rose from 4% to 9%. In the first phase of the Great Depression, which began in 1929, real output fell by nearly 30%, while the unemployment rate jumped from 3% to nearly 25%. In the late stages of that terrible recession, many businesses and individuals went bankrupt. Banks went bankrupt and the economy took more than 10 years - and a world war - to recover. It took the stock market 25 years (until 1954) to return to its peak level in 1929.
Financial Crisis: Focus on emerging markets, corporate bonds and banking systems
Although the global public health crisis triggered by the COVID-19 epidemic is likely to have led to economic recessions in many countries, it has not triggered the financial crisis so far. Financial institutions are more resilient than the financial tsunami period more than ten years ago. Thanks to the relief policies of various countries, the market panic is significantly alleviating.
Nomura Securities believes that the measures taken by central banks and governments may not help curb the virus, and the virus has its own patterns of change. However, "the unprecedented scale of global policy measures we have seen so far will ensure that the financial system does not collapse."
Financial crisis usually occurs when asset prices are high (such as stock markets after a decade of bull market), or when there is too much debt in the financial system (such as after years of high borrowing with low interest rates). Sometimes a severe recession can itself endanger financial stability, as rising unemployment and falling economic output can trigger a wave of defaults that will damage banks' health. Fortunately, this time, policy makers learned from 2008 and took action earlier and more actively.
Barron's magazine believes that economic activity in most parts of the world has stalled, and it is not clear how many companies and countries will be forced to default. Although there is no obvious sign that a financial crisis has occurred, such a crisis may be more destructive once it occurs, as the financial crisis threatens the flow of capital in the economy and spreads to the entire financial system. Three key areas of emerging markets, U.S. corporate bonds, and the banking system itself need to be closely monitored.
—Emerging markets
International Financial Association (IIF) data shows that in the 70 days starting from January 21, about US$92.5 billion in securities investments held by non-residents flowed out of emerging markets, and the outflow rate was faster than during similar events such as the financial crisis.
Independent research firm Capital Economics warned that emerging markets could experience a round of sovereign debt defaults. As borrowing costs soar, countries like Ecuador , Argentina and Zambia are under tremendous pressure. Other countries may also be in trouble. Robin Brooks, chief economist at the Institute of International Finance, said that for example, South Africa's currency is seriously overvalued, has a serious imbalance in the balance of payments, has a long-term current account deficit, and economic growth is also negative.Also fragile are many state-owned enterprises, including Pemex, the Mexican oil giants Pemex and Petrobras.
IMF officials said that more than 80 countries have asked the IMF to provide emergency zero-rate or low-interest loans of about $20 billion, most of which are emerging markets. The IMF has a loan amount of US$1 trillion, and currently has sufficient resources to meet the corresponding needs.
CITIC Macro believes that the IMF has enough resources to bail out smaller emerging markets, but if large economies (such as Turkey and South Africa) need assistance, the organization may be difficult to cope with, but turmoil in emerging markets may not trigger a systemic crisis that will affect the world. Because larger emerging markets such as Brazil, India, Russia, China and South Korea have huge foreign exchange reserves, foreign investors hold less debt, and the domestic bond market is huge, which means that even if the situation worsens, these countries are unlikely to need bailout.
Data released by the China Foreign Exchange Administration on April 7 showed that as of the end of March, China's foreign exchange reserves were US$3060.63 billion, a decrease of US$47.3 billion from the beginning of the year. Wang Chunying, spokesperson of the State Administration of Foreign Exchange, said that the long-term positive development trend of China's economy will not change and will continue to provide support for the overall stability of the scale of foreign exchange reserves.
—US corporate bond
U.S. corporate bond market is another area to worry about. In recent years, a large number of American companies have taken advantage of the low borrowing costs, and the market is worried that a wave of defaults is coming when the economy has stagnated. In March alone, $92 billion in bond ratings have been downgraded from investment grade to junk. The spread between high-yield corporate bonds (also known as "junk bonds") and U.S. Treasury bonds climbed to 1,100 basis points on March 23, the highest level since the global financial crisis. In the three crises from 1990 to 1991, 2000 to 2001, and 2007 to 2009, junk bonds suffered large-scale sales and yields rose sharply, and default rates also soared.
One question faced by whether the global financial system can remain stable is: when companies cannot repay their debts, which companies' balance sheets will be affected more seriously? Barron's view is that unlike the balance sheets of banks with higher leverage in 2008, many of the assets that may be problematic appear on the balance sheets of non-bank financial institutions.
international information review agency S&P (S&P) said on March 21 that the wave of debt defaults in may sweep the United States and Europe. "In the next 12 months, the default rate of non-financial enterprises in the United States may rise to more than 10%, while Europe is approaching 10%.
In order to maintain credit flow, the Federal Reserve announced on April 9 that it would expand the scope of corporate bond acquisitions to include corporate bonds that were still in the investment grade until March 22, but were later downgraded to BB-level (third-level junk bonds) or above, which actually expanded its balance sheet coverage to corporate bonds that are expected to be downgraded to speculative due to the impact of the epidemic, and may reach hundreds of billions of dollars in scale. The move caused high-yield bonds to hit their biggest single-day gains since 1998 on April 9, narrowing interest rate spreads, and also caused the Federal Reserve's own balance sheet to expand to a record $6.08 trillion.
- Banking system
As the nerve of the global financial system, the banking industry is facing the first real test since the 2008 financial crisis.
Since the 2008 financial crisis, the Federal Reserve has conducted stress tests on the banking industry every year to evaluate whether the U.S. banking industry has sufficient funds to withstand severe economic shocks. During the 2019 stress test, the Fed sets tough economic conditions—assuming unemployment rose to 10%, and GDP contracted by 8.5%. To successfully pass the assessment, banks must maintain sufficient capital and current dividend levels within two years and continue to buy back shares during the economic downturn. With the years of regulatory efforts of the Federal Reserve, the operations of US financial institutions have significantly converged compared with the extensive expansion of pre-crisis, the scale and product innovation of complex derivatives in the financial system have both declined significantly, and the liquidity of commercial banks has remained sufficient.
Banks were seen as part of the crisis during the financial crisis of 2008-2009, and now banks that are accelerating lending to businesses are generally seen by analysts as part of the solution due to unprecedented stimulus packages. In mid-March, US President Trump 8 convened senior officials from large banks across the United States to the White House to discuss how to deal with the impact of the epidemic on small businesses and the market. "They took ten years to prepare for the moment and they have the ability to be a source of power for the economy," said Michael Mayo, a banking analyst at Wells Fargo. "But IMF officials issued a warning that is different from that optimism. On March 31, Tobias Adrian, financial advisor and director of the currency and capital markets department of the International Monetary Fund (IMF), said that the increase in debt defaults is imminent, and the pressure on the banking system is increasing. It is not ruled out that in more severe cases, individual banking systems may need to inject capital or even reorganize.
Sir Paul Tucker, former deputy governor of the Bank of England and current chairman of the Systemic Risk Committee, told Barron's magazine that authorities must assess how the financial system responds to the surge in credit demand and also assess losses caused by inaction in this situation. Stress testing should be performed using two worst scenarios that may arise. "One is that a major epidemic country restarted its economy this summer, and the second wave of the epidemic broke out; the other is that countries did not unblock their economy until the vaccine was put into use. Both situations are possible."
html On the evening of April 3, the Federal Deposit Insurance Corporation (FDIC) announced that it would take over the small bank located in , West Virginia, The First State Bank (hereinafter referred to as First Bank). West Virginia's financial regulator has closed the bank. This is the first bank in the United States to go bankrupt since the outbreak of the epidemic.
The United States experienced a large number of bank bankruptcies and was taken over during the two economic and financial crises from 1990 to 1991, 2008 to 2010. According to statistics from FOX Business, 465 banks in the United States went bankrupt between 2008 and 2012.
Public health crisis: The COVID-19 epidemic is the biggest variable
Picture/IC
Back to the source of this storm itself - the COVID-19 epidemic. If cannot control the spread of the epidemic and the secondary rebound, no matter how many relief measures each country takes, it will not be enough to make up for the losses caused by the impact of the epidemic. There are still many unknown answers about the virus transmission itself: Will people who have been infected with the new coronavirus be infected again? Or do they still carry the virus and will they infect people who have not been infected?
The epidemic is like a "wild card". As Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases (NIAID), said, government policies aim to mitigate the economic and fiscal damage caused by the pandemic, but the timeline is in the hands of the virus.
"Why large-scale interventions by central banks and governments have not effectively curbed market panic so far, the answer seems clear. During the global financial crisis, actions taken by central banks and the Ministry of Finance have simultaneously addressed the consequences and root causes of panic. Injection of capital and providing liquidity both play a role. This time, central banks can help mitigate the direct impact, but address the root cause - the pathogen itself, is something they cannot do. Before we control Covid-19, the only thing they can do is to prevent economic and financial consequences from getting out of control." On March 20, Peter Sands, executive director of the Global Fund for Fighting AIDS, Tuberculosis and Malaria and former CEO of Standard Chartered Bank, wrote in Barron's magazine.
He believes that there is a huge gap between the financial and health sectors. Although historical experience, reasoning analysis and current direct experiences have shown that infectious disease outbreaks are one of the biggest threats to economic growth, they are rarely mentioned by macroeconomic analysts because "we usually hover between severe overestimation (such as shark attacks, terrorism) and severe underestimation (such as financial crisis, epidemics).
According to statistics from Johns Hopkins University in the United States, as of 5:00 Beijing time on April 11, the number of confirmed cases of new coronavirus pneumonia worldwide has exceeded 1.68 million and the number of deaths has exceeded 100,000. The number of confirmed cases in the United States at the end of March has jumped to the world's first place, becoming the epicenter of the global epidemic. Currently, more than 490,000 confirmed cases and 18,000 deaths.
As Europe's daily new confirmed cases are showing signs of stability, the market expects the epidemic in the United States to peak in late April. Meanwhile, the spread of the epidemic in emerging economies with weak medical conditions and in Africa may intensify. Stuart Kaye, portfolio manager of
Matarin Capital Management, wrote: "The market can easily go back to the past and test the next low. It will depend on the progress of the epidemic and the cost to society." Chen Wenyu, deputy general manager of Invesco Great Wall, said that the next market trend is not affected by fundamentals, but more by the progress of epidemic control. "We believe that after the panic market sharp drop, market volatility may decline slightly now. But everything is determined by the epidemic and cannot be determined by other policies, so volatility is uncontrollable in the short term. This period depends on the control of the epidemic." He said.
As the first country to resume work and production, whether China can control the secondary rebound of the epidemic has also attracted much attention from the market. In the article "The fate of global stock markets depends on China", Barron's magazine mentioned that investors should be wary of whether there will be a rebound in the coronavirus epidemic in China and other parts of Asia, which is an important signal of whether the stock market will continue to decline.
Looking for value: Long-term investors do not have to wait for the bottom
. Facing many uncertainties, most institutions believe that it is still difficult to determine whether the global market has completed the bottoming out at the current stage. U.S. stocks began to rebound continuously after hitting a closing low on March 23. As of April 8, the Dow Jones Industrial Average and the S&P 500 rebounded 26% and 23% respectively, entering a technical bull market.
technical analysis expert Louise Yamada wrote in an email that the market may still fall to a low point, and the current rebound may be an "important part of the bear market rebound", which is not uncommon in previous market cycles. Even after the brief bear market in 1987, the stock market took a "one or more stable period" to recover.
Barron's magazine pointed out in a cover report on March 27 that the bear market rarely ends without retesting the lows. In 2008, financial system rescue plans and other measures were passed to help the stock market rebound sharply from lows. Then, people's attention turned to the real economy and corporate profitability. Lori Calvasina, a strategist at RBC, said the initial estimates were far from what it was, and the S&P 500 bottomed out on March 9, 2009 until analysts regained their corporate earnings trends.
Refinitiv GFMS precious metals senior analyst Li Gangfeng believes that in theory, global stock markets may be in the "Bear Phase 2". In his April 1 report, he said that the rebound in this phase could last for weeks to months, and the rebound could be between one-third and one-half of the total decline in the entire bear market. However, the profits of various companies are actually showing signs of a decline. As asset prices rise but profits fall, valuations rise again, and another round of decline is gradually brewing.
Goldman Sachs predicted in late March that the index would fall to 2,000 points by the middle of the year and then rise to 3,200 points by the end of the year. Its model is based on the index's P/E ratio shrinks to 12 times and then rebounds to more than 18 times.
CICC chief strategist Wang Hanfeng believes that the temporary lows of US stocks are likely to have passed, and the probability of the S&P 500 falling below 2191.86 points (52-week low) in the first half of the year is relatively small. "We have noticed that the number of new cases in countries like Italy and Spain has dropped significantly. The most important thing is whether the United States can enter a platform or a period of easing in the next one or two weeks." He told the Chinese version of Barron's magazine on April 8, "Before this round of decline, the valuation of US stocks was at a high level second only to the previous level before the bursting of the Internet bubble, and now it has returned to the historical average."
Wang Hanfeng pointed out that the subsequent trend of US stocks will also depend on the loss of profits. "If the profit reduction is roughly in line with expectations, the market should enter a relatively normal range - it may also fall, but it will no longer be as panic as the end of February to the end of March."
However, for long-term investors, whether they can hit the lowest point of the market is not the most important. Barron's column on March 27 analyzed that if you are a long-term investor, you only need to buy stocks (at a reasonable price compared to other options) and ensure long-term holding. "As long as we expect profits to return to previous levels in the coming years, the S&P 500's recent levels will remain reasonable, especially compared to the 0.8% yield on 10-year U.S. Treasury bonds."
UBS Wealth Management recommends that investors can seek to deploy excess cash on investment targets with discounted prices. At the same time, buying higher-risk assets in batches will help the investment portfolio to smoothly overcome short-term fluctuations. "Companies with relatively cheap valuations in Asian stocks, and relatively limited profits due to the epidemic are all favored. In addition, high-quality global stocks will also be relatively resilient when markets are under pressure." Its report said, "Investors need to be more cautious. Stock investment should be carefully selected and can focus on three areas: oversold stocks, relatively resistant stocks, and long-term beneficiaries."
Standard Chartered Bank Wealth Management Department said that there may be opportunities in the next few weeks, "We are optimistic about Asian (except Japan) stocks, US stocks and Asian dollar bonds, and continue to use gold as hedge tools."
Nomura Securities gave the "overweight" rating: "MSCI China", South Korea and Philippines . Morningstar Asia's stock research team said in a report on April 6 that the stock price of the Asian company it tracks is currently 0.8 times the estimated fair value of Morningstar. "By industry perspective, cyclical consumption, financial services and real estate are currently the highest value."
htmlOn April 2, Morgan Stanley significantly increased the "over-allocation" range of Chinese stocks from 50 basis points to 250 basis points. India, Singapore and Brazil also received "super-equipped" ratings; Hong Kong, Qatar and Malaysia markets were raised to "neutral".
Morgan Stanley Equity strategist said in the report that although the MSCI China Index has significantly outperformed the MSCI Emerging Markets Index since the end of January, "we believe China can achieve a record valuation premium over other emerging markets" . The reasons for optimism include the current macro recovery trend, government policy response, stock market and economic structure, and liquidity and capital flow trends. Based on the expected price-to-earnings ratio, the current premium rate is 6.3%, the highest relative valuation since May 2018.
As for the domestic market in China, Wang Hanfeng of CICC believes that overseas funds will continue to allocate Chinese assets, and this trend has not changed at present. On the one hand, after the impact of the epidemic, the overall interest rates of developed markets are at a level close to zero, and there are even negative interest rates, while China's interest rate levels are still relatively high among major economies. At the same time, even if China's economic growth rate has declined, it is much better than these economies.
"The current proportion of China's assets in global allocation does not match the proportion of China's total economic output in the global economy. In the future, foreign capital will still have a lot of room for Chinese assets - whether it is stocks or bonds - to allocate more." He said.
(This article was first published in "Finance" magazine on April 13, 2020)
This article is an original article from "Finance" magazine. It may not be reproduced or mirrored without authorization. If you need to reprint, please leave a message at the end of the article to apply and obtain authorization.
Banks were seen as part of the crisis during the financial crisis of 2008-2009, and now banks that are accelerating lending to businesses are generally seen by analysts as part of the solution due to unprecedented stimulus packages. In mid-March, US President Trump 8 convened senior officials from large banks across the United States to the White House to discuss how to deal with the impact of the epidemic on small businesses and the market. "They took ten years to prepare for the moment and they have the ability to be a source of power for the economy," said Michael Mayo, a banking analyst at Wells Fargo. "But IMF officials issued a warning that is different from that optimism. On March 31, Tobias Adrian, financial advisor and director of the currency and capital markets department of the International Monetary Fund (IMF), said that the increase in debt defaults is imminent, and the pressure on the banking system is increasing. It is not ruled out that in more severe cases, individual banking systems may need to inject capital or even reorganize.
Sir Paul Tucker, former deputy governor of the Bank of England and current chairman of the Systemic Risk Committee, told Barron's magazine that authorities must assess how the financial system responds to the surge in credit demand and also assess losses caused by inaction in this situation. Stress testing should be performed using two worst scenarios that may arise. "One is that a major epidemic country restarted its economy this summer, and the second wave of the epidemic broke out; the other is that countries did not unblock their economy until the vaccine was put into use. Both situations are possible."
html On the evening of April 3, the Federal Deposit Insurance Corporation (FDIC) announced that it would take over the small bank located in , West Virginia, The First State Bank (hereinafter referred to as First Bank). West Virginia's financial regulator has closed the bank. This is the first bank in the United States to go bankrupt since the outbreak of the epidemic.
The United States experienced a large number of bank bankruptcies and was taken over during the two economic and financial crises from 1990 to 1991, 2008 to 2010. According to statistics from FOX Business, 465 banks in the United States went bankrupt between 2008 and 2012.
Public health crisis: The COVID-19 epidemic is the biggest variable
Picture/IC
Back to the source of this storm itself - the COVID-19 epidemic. If cannot control the spread of the epidemic and the secondary rebound, no matter how many relief measures each country takes, it will not be enough to make up for the losses caused by the impact of the epidemic. There are still many unknown answers about the virus transmission itself: Will people who have been infected with the new coronavirus be infected again? Or do they still carry the virus and will they infect people who have not been infected?
The epidemic is like a "wild card". As Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases (NIAID), said, government policies aim to mitigate the economic and fiscal damage caused by the pandemic, but the timeline is in the hands of the virus.
"Why large-scale interventions by central banks and governments have not effectively curbed market panic so far, the answer seems clear. During the global financial crisis, actions taken by central banks and the Ministry of Finance have simultaneously addressed the consequences and root causes of panic. Injection of capital and providing liquidity both play a role. This time, central banks can help mitigate the direct impact, but address the root cause - the pathogen itself, is something they cannot do. Before we control Covid-19, the only thing they can do is to prevent economic and financial consequences from getting out of control." On March 20, Peter Sands, executive director of the Global Fund for Fighting AIDS, Tuberculosis and Malaria and former CEO of Standard Chartered Bank, wrote in Barron's magazine.
He believes that there is a huge gap between the financial and health sectors. Although historical experience, reasoning analysis and current direct experiences have shown that infectious disease outbreaks are one of the biggest threats to economic growth, they are rarely mentioned by macroeconomic analysts because "we usually hover between severe overestimation (such as shark attacks, terrorism) and severe underestimation (such as financial crisis, epidemics).
According to statistics from Johns Hopkins University in the United States, as of 5:00 Beijing time on April 11, the number of confirmed cases of new coronavirus pneumonia worldwide has exceeded 1.68 million and the number of deaths has exceeded 100,000. The number of confirmed cases in the United States at the end of March has jumped to the world's first place, becoming the epicenter of the global epidemic. Currently, more than 490,000 confirmed cases and 18,000 deaths.
As Europe's daily new confirmed cases are showing signs of stability, the market expects the epidemic in the United States to peak in late April. Meanwhile, the spread of the epidemic in emerging economies with weak medical conditions and in Africa may intensify. Stuart Kaye, portfolio manager of
Matarin Capital Management, wrote: "The market can easily go back to the past and test the next low. It will depend on the progress of the epidemic and the cost to society." Chen Wenyu, deputy general manager of Invesco Great Wall, said that the next market trend is not affected by fundamentals, but more by the progress of epidemic control. "We believe that after the panic market sharp drop, market volatility may decline slightly now. But everything is determined by the epidemic and cannot be determined by other policies, so volatility is uncontrollable in the short term. This period depends on the control of the epidemic." He said.
As the first country to resume work and production, whether China can control the secondary rebound of the epidemic has also attracted much attention from the market. In the article "The fate of global stock markets depends on China", Barron's magazine mentioned that investors should be wary of whether there will be a rebound in the coronavirus epidemic in China and other parts of Asia, which is an important signal of whether the stock market will continue to decline.
Looking for value: Long-term investors do not have to wait for the bottom
. Facing many uncertainties, most institutions believe that it is still difficult to determine whether the global market has completed the bottoming out at the current stage. U.S. stocks began to rebound continuously after hitting a closing low on March 23. As of April 8, the Dow Jones Industrial Average and the S&P 500 rebounded 26% and 23% respectively, entering a technical bull market.
technical analysis expert Louise Yamada wrote in an email that the market may still fall to a low point, and the current rebound may be an "important part of the bear market rebound", which is not uncommon in previous market cycles. Even after the brief bear market in 1987, the stock market took a "one or more stable period" to recover.
Barron's magazine pointed out in a cover report on March 27 that the bear market rarely ends without retesting the lows. In 2008, financial system rescue plans and other measures were passed to help the stock market rebound sharply from lows. Then, people's attention turned to the real economy and corporate profitability. Lori Calvasina, a strategist at RBC, said the initial estimates were far from what it was, and the S&P 500 bottomed out on March 9, 2009 until analysts regained their corporate earnings trends.
Refinitiv GFMS precious metals senior analyst Li Gangfeng believes that in theory, global stock markets may be in the "Bear Phase 2". In his April 1 report, he said that the rebound in this phase could last for weeks to months, and the rebound could be between one-third and one-half of the total decline in the entire bear market. However, the profits of various companies are actually showing signs of a decline. As asset prices rise but profits fall, valuations rise again, and another round of decline is gradually brewing.
Goldman Sachs predicted in late March that the index would fall to 2,000 points by the middle of the year and then rise to 3,200 points by the end of the year. Its model is based on the index's P/E ratio shrinks to 12 times and then rebounds to more than 18 times.
CICC chief strategist Wang Hanfeng believes that the temporary lows of US stocks are likely to have passed, and the probability of the S&P 500 falling below 2191.86 points (52-week low) in the first half of the year is relatively small. "We have noticed that the number of new cases in countries like Italy and Spain has dropped significantly. The most important thing is whether the United States can enter a platform or a period of easing in the next one or two weeks." He told the Chinese version of Barron's magazine on April 8, "Before this round of decline, the valuation of US stocks was at a high level second only to the previous level before the bursting of the Internet bubble, and now it has returned to the historical average."
Wang Hanfeng pointed out that the subsequent trend of US stocks will also depend on the loss of profits. "If the profit reduction is roughly in line with expectations, the market should enter a relatively normal range - it may also fall, but it will no longer be as panic as the end of February to the end of March."
However, for long-term investors, whether they can hit the lowest point of the market is not the most important. Barron's column on March 27 analyzed that if you are a long-term investor, you only need to buy stocks (at a reasonable price compared to other options) and ensure long-term holding. "As long as we expect profits to return to previous levels in the coming years, the S&P 500's recent levels will remain reasonable, especially compared to the 0.8% yield on 10-year U.S. Treasury bonds."
UBS Wealth Management recommends that investors can seek to deploy excess cash on investment targets with discounted prices. At the same time, buying higher-risk assets in batches will help the investment portfolio to smoothly overcome short-term fluctuations. "Companies with relatively cheap valuations in Asian stocks, and relatively limited profits due to the epidemic are all favored. In addition, high-quality global stocks will also be relatively resilient when markets are under pressure." Its report said, "Investors need to be more cautious. Stock investment should be carefully selected and can focus on three areas: oversold stocks, relatively resistant stocks, and long-term beneficiaries."
Standard Chartered Bank Wealth Management Department said that there may be opportunities in the next few weeks, "We are optimistic about Asian (except Japan) stocks, US stocks and Asian dollar bonds, and continue to use gold as hedge tools."
Nomura Securities gave the "overweight" rating: "MSCI China", South Korea and Philippines . Morningstar Asia's stock research team said in a report on April 6 that the stock price of the Asian company it tracks is currently 0.8 times the estimated fair value of Morningstar. "By industry perspective, cyclical consumption, financial services and real estate are currently the highest value."
htmlOn April 2, Morgan Stanley significantly increased the "over-allocation" range of Chinese stocks from 50 basis points to 250 basis points. India, Singapore and Brazil also received "super-equipped" ratings; Hong Kong, Qatar and Malaysia markets were raised to "neutral".
Morgan Stanley Equity strategist said in the report that although the MSCI China Index has significantly outperformed the MSCI Emerging Markets Index since the end of January, "we believe China can achieve a record valuation premium over other emerging markets" . The reasons for optimism include the current macro recovery trend, government policy response, stock market and economic structure, and liquidity and capital flow trends. Based on the expected price-to-earnings ratio, the current premium rate is 6.3%, the highest relative valuation since May 2018.
As for the domestic market in China, Wang Hanfeng of CICC believes that overseas funds will continue to allocate Chinese assets, and this trend has not changed at present. On the one hand, after the impact of the epidemic, the overall interest rates of developed markets are at a level close to zero, and there are even negative interest rates, while China's interest rate levels are still relatively high among major economies. At the same time, even if China's economic growth rate has declined, it is much better than these economies.
"The current proportion of China's assets in global allocation does not match the proportion of China's total economic output in the global economy. In the future, foreign capital will still have a lot of room for Chinese assets - whether it is stocks or bonds - to allocate more." He said.
(This article was first published in "Finance" magazine on April 13, 2020)
This article is an original article from "Finance" magazine. It may not be reproduced or mirrored without authorization. If you need to reprint, please leave a message at the end of the article to apply and obtain authorization.
