Only clear COVID narrative will set markets on path out of volatility – Graham WainerPublished on 30 Mar 2020
Two possible coronavirus outcomes keep investors guessing
The outbreak of COVID-19 and ensuing pandemic has caused very significant trauma in financial markets. The rapid decline in risk asset prices and accompanying volatility reveal that markets are struggling to ‘price the risk’ given the high degree of uncertainty and variable news flow. What appears disorderly is in fact the market’s rational response.
While the scale and speed has been severe, we can take some comfort from lessons learned from historical global economic crises. Every past crisis has had different causes, but markets have invariably recovered, albeit they have taken varying times to do so.
Today, investors face tactical and strategic decisions based around two competing narratives. The first is that COVID-19 is broadly manageable, that it will have a medium-term negative impact (a year or so), following which, with lessons learned, the economy and financial markets will recover and normalise to some extent.
The second narrative is that COVID-19 is a unique game-changer which will transform everything we know in ways we cannot comprehend.
At the time of writing, there is a sense that the probability of ‘narrative one’ being right has increased a little bit over the last two weeks and that the likelihood of ‘narrative two’ appears to have reduced somewhat since the outbreak. New information emerges at such a rate, though, that this may change.
There are several variables around which these competing narratives pivot. Can policymakers do what it takes to stabilise the economy and avoid permanent damage? Will containment of the virus flatten the curve and prevent medical systems being overwhelmed? How quickly will society adjust?
There are also the questions around treatments. A vaccine is some time away, but anti-virals may be closer. Since its outbreak in the early 1980s, it took around seven years to develop anti-virals for AIDS. Is it not conceivable therefore that today we will have access to at least semi-effective treatments within a shorter space of time, given that medical science and technology are so much more advanced? This, combined with the fact that the world economy is more robust than perhaps we are giving it credit for, gives us reason to be more positive.
In the meantime, high levels of market volatility will persist until one narrative dominates. When it does, the speed of recovery or decline will be very rapid.
Graham Wainer is CEO and Head of Investments at Stonehage Fleming Investment Management. He is also Chairman of the CIO Group.
Read more articles by Graham.
House View – Q1 2020
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