Chris Forgan, Portfolio Manager & Charlotte Harington, Assistant Portfolio Manager, Fidelity Multi Asset
Over the coming months the true scale of the shutdown on global economies will become apparent, but it does not appear likely that a recession will be avoided. The question on everyone’s mind is how deep and for how long will we be in a recession? Chris Forgan, Portfolio Manager and Charlotte Harington, Assistant Portfolio Manager of the Fidelity Multi Asset Open range look at the key market indicators to try and gauge what we might expect next for the global economy.
- In the coming months the true scale of the shutdown on global economies will become apparent, but it does not appear likely that a recession will be avoided.
- The requirement for diversified approaches, even within defensive allocations, is of primary importance.
- On the positive side of the ledger, unlike in the case of natural disasters, capacity has not been affected in this case, so should be able to bounce back quickly once demand returns.
We are only beginning to see the full impact of the coronavirus on economic activity as governments ‘lock down’ significant portions of the economy to stop the virus’ spread. In the coming months the true scale of the shutdown on global economies will become apparent, but it does not appear likely that a recession will be avoided. The question is rather how deep and for how long we will be in a recession.
Markets have responded to this unprecedented global supply and demand shock with very high levels of volatility, including significant sell-offs of major asset classes. In addition, oil markets already struggling with the virus-related demand shock were hit with a supply increase as OPEC failed to agree on cuts to production and a price war commenced. The speed with which the selloff occurred, and also the uniformity of the sell-offs on the worst days - where safe havens sold off with risk assets - has been historically significant. Against this backdrop, we see defensiveness as a priority over trying to time a bottom in asset prices.
From the beginning of the year until 21 February, the market’s ‘fear gauge’ tracking the 30-day implied volatility of the S&P 500 - the Chicago Board Options Exchange Volatility Index (VIX) - was sedated even as news of the coronavirus broke and a market selloff ensued in late January and early February. Following this brief period, volatility retreated, and markets again touched all-time highs.
However, as news of the spread into Europe and the United States became clear, markets sold off, with the S&P 500 losing one third of its value between 19 February and 23 March, while the VIX spiked to all-time highs in the space of only three weeks, breaching the peak seen in the Global Financial Crisis.
The uniformity of selloff has also been concerning. Demand for cash, preferably in US dollars, has seen traditional safe havens like US Treasuries and gold selloff along with risk assets on the worst days of market volatility. The requirement for diversified approaches, even within defensive allocations, is of primary importance.
Can comparisons be made?
It is also difficult to compare the recent selloff with previous market events for other reasons. The global financial crisis was primarily a crisis of the financial sector which called into question the viability of the banking system, but which then had knock-on effects for the economy. But this crisis is different, and the non-financial corporate sector is, for now, bearing the brunt of the impact of the economic shutdown required to help contain the spread of the virus.
Policy responses have been swift, and while it seems only economic ‘lock down’ can stem the spread of the virus, monetary and fiscal policy can help to ease conditions for companies struggling with cashflow issues as demand falls. Monetary policy is helping the funding markets and keeping debt-servicing costs low for the corporate sector, whilst helping to drive government borrowing costs lower.