- Marcus Brookes
- 25 March 2020
- 5 mins reading time
Governments and central banks around the world are rising to the challenge of COVID-19.
The response can be separated into two broad categories.
The first consists of the actions being taken to reduce contagion and provide treatment to the most acutely affected. This creates some unavoidable and unpleasant consequences.
The second category is intended to offset those consequences. It includes a range of measures being taken to help people and businesses cope with the implications of travel and other restrictions.
Both sets of actions are necessary for very different reasons.
Tackling the virus
The UK government is ratcheting up the severity of measures to slow the contagion rate of COVID-19. The restriction of movement might appear overbearing, but the data suggest that it is absolutely necessary. The respective contagion rates and fatalities in China and Italy make for a very sobering contrast.
In China, after a slow start, the authorities imposed what might have appeared to be draconian rules prohibiting movement, especially around the worst-affected area and original source of the contagion, the Hubei province. Over the subsequent weeks, active cases peaked at almost 60,000 people with the number dying each day reaching 150 people at its highest point according to the 24 March 2020 numbers published on WorldofMeters.com.
This has left almost 3,300 people dead to date, which equates to around 4% of all closed cases.
By contrast, Italy imposed a less stringent policy of movement on residents in the worst-hit north of the country. Large numbers of people ignored the advice feeling it didn’t apply to them and, unwisely, travelled to be with family members largely in the south of the country.
According to WorldofMeters.com, Italy’s total death rate from the virus has already surpassed that of China, reaching more than 6,000 at the time of writing. That’s the equivalent to 45% of closed cases. Thankfully, the number of new cases and fatalities appears to have peaked. But the lesson is clear.
The measures that the UK prime minister is imposing are absolutely necessary and should be followed by everyone.
The financial fall-out
These measures have some unpleasant but unavoidable consequences. If restaurants, shops and other businesses are closed, sales take a sudden and severe hit, profits can vanish and meeting salary payments becomes very challenging. That makes it difficult for many people to maintain mortgage, rent, loan and other repayments, not to mention other daily necessities.
That’s why the Bank of England and UK government are doing so much to push new cash into the system, provide incredibly cheap loan facilities, tax holidays and grants.
It’s going to create a huge amount of public debt but, from the analysis that I’ve seen, it’s the right thing to do. This is because there’s a longer-term picture that is of particular interest to me as an investor.
Short sharp shock
The substantial loss of sales and wages is taking its toll on companies and the global economy. We’ve already seen 54 companies issue profit warnings in the UK since the beginning of the year. According to our investment management partners at Schroders, the global economy will shrink by 3.1% in 2020. This is a sharp downward adjustment from the more than 2% growth that data were indicating in December.
However, the updated outlook now suggests that the global economy should rebound by 7.2% in 2021. The data on which this analysis is based are predicated on the financial stimulus that governments and central banks are committing to provide.
In short, we are facing some really unpleasant months in many ways. While the intervention of financial authorities might appear removed from the central problem, they are, in fact, essential to help the economy and daily life recover relatively quickly.
Without these measures, I suspect that the financial fall-out from this horrible period could be far worse and much longer lasting.
Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment,
Any views expressed are our in-house views as at the time of publishing.
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