News & analysis CORONAVIRUS OUTLOOK DIVIDES EXPERTS
While the immediate impact of the Coronavirus crisis has been a sharp decline in stock market values, economists are divided on the long-term implications for the global economy. Mark Carney, who until recently was governor of the Bank of England, and European Central Bank president Christine Lagarde have been careful to describe the effects of the virus as a “shock” rather than a recession. Similarly, Morningstar forecasts that the recession, though “savage” by slicing a probable 2% off global economic growth, will have a “minimal” long-term effect. Yet some commentators have warned that the recession caused by Coronavirus, also known as Covid-19, would be an intense, if not a prolonged affair. However, employment figures sketch a dif- ferent picture. In late March, joblessness in the US surged along with the virus, hitting a record 3.28 million, while almost half a mil- lion people applied for the universal credit benefit in the UK as Covid-19 infection rates climbed. “We’re now forecasting not just recession, but the deepest peak-to-trough decline in recent memory,” Eric Lascelles, an economist, said. Accordingly, as governments rush to prop up their wounded economies, debt will need to be monetised and central banks will want to take control of yield curves, according to Aon.
Morningstar said it anticipates a vaccine being ready to be de- ployed by mid- to late 2021 followed by a quick recovery of the global economy. It further forecast that rapid policy interven- tions by central banks and governments would spur global GDP to grow above trend and for much of the economic dam- age to be healed by 2024.
The fall in equity valuations presented two opportunities, Morn- ingstar commented. Shares in a handful of large-cap firms had dropped significantly, allowing investors to buy shares that would deliver good cash-flows over time. Secondly, risky firms had been excessively punished by the Coro- navirus crisis, thereby giving investors a larger number of possible rewards for taking risks with few direct links to the virus. Active managers with large equity exposures would be hit by a double whammy of a fall in asset-based fees and cash out-flows as inves- tors flee to safety. Morningstar said it judged banks to be better positioned for the downturn than on previous occasions. They had been unusual- ly damaged during the global financial crisis but that this was the result of systemic issues and not having enough capital at the time. It also singled out telecom services for being highly recession resistant and said that the Covid-19 disarray would further im- prove its position in a world in which its services are considered indispensable. The sector had mild exposure to the effects of the virus and, therefore, opportunities had become apparent.
RISKIER DEBT DEFAULTS TO RISE – REPORT
The corporate junk bond default rate is set to soar to high sin- gle digits during the next year due to Covid-19, according to S&P Global Ratings.
While collateralised loan obligation (CLOs) ratings are unlike- ly to be downgraded in the short-term, protracted economic stress would subject them to downward pressure, with specu- lative-grade debt the first to be affected, the ratings agency said. A flood of junk bond defaults would in turn affect CLOs, which are backed by corporate debt, S&P predicted in a report. “The combined effect of Covid-19, with the collapse in oil pric- es and extreme volatility in capital markets will inevitably have severe implications for credit,” the report said. A spike in junk bond defaults could also be bad news. For ex- ample, the share price of London-listed CLO investor Fair Oaks Income halved in March as the firm announced it was sus- pending its dividend.
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The situation is more severe in the US, where the JP Morgan Leveraged Loan index reported its strongest fall on record. Be- tween February and March, it fell by more than $15 (£12.26) to a new low of $82 (£66.90) on 25 March. The US Federal Reserve has attempted to mitigate fears of an upcoming credit crunch with large-scale injections of liquidity. At the end of March, it announced a $100bn (£81.5bn) bond purchase programme. However, the US’ lender of last resort has only committed to buying investment-grade debt, hoping that the purchases would eventually push investors into the riskier segments of the market.
The European Central Bank has also announced it is to buy €750bn (£661.2bn) worth of bonds, covering investment grade, sovereign and corporate debt. S&P Global Ratings said that measures to contain the virus have pushed the world into a recession and it expects the Euro- zone’s GDP to be cut by between 0.5% and 1.0% in 2020.
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