Rothschild & Co Asset Management: Marktausblick Europa August 2020

Marc-Antoine, how long will the crisis last?

Marc-Antoine: There is pervasive uncertainty around the economic outlook. Indeed, the magnitude and persistence of the adverse covid-19 shock will depend on several factors. The length of the pandemic and required lockdowns have been more pronounced than expected by most investors as seasonality proved not to be an ally. In fact, voluntary social distancing and displaced workers’ ability to secure employment will negatively impact spending for some time. What’s more, unemployed workers exiting the workforce may make it more difficult for activity to bounce back once the pandemic fades. Longer term, productivity could be permanently hurt by the global supply chain reconfigurations as well as the impact of changes to strengthen workplace safety such as staggered work shifts and new workplace practices relating to proximity of employees on production lines. However, the development of a safe, effective vaccine is a wild card as it would lift sentiment and improve economic growth prospects.

Marc-Antoine, do you see any long term damages or opportunities for the markets and investors?

Public policy countermeasures have limited the economic damage. Indeed, sizable fiscal and financial sector countermeasures were deployed in most countries and swift and, in some cases, novel actions by major central banks have enhanced liquidity provision and limited the rise in borrowing costs. However, public debt ratios have skyrocketed and represents a real challenge longer term. What’s more, as yields on government bonds fall, debt trading at negative rates has climbed once again. This will reinforce the “The Is No Alternative” (TINA) argument, pushing investors into risky assets which raises questions and risks regarding the integrity of financial markets. As the IMF recently stated, “The extent of the recent rebound in financial market sentiment appears disconnected from shifts in underlying economic prospect.”

Marc-Antoine do you see differences in regards to developed markets vs. Emerging markets?

There are substantial differences across countries, reflecting the evolution of the pandemic and the effectiveness of containment strategies. The structure of the economy (for example, dependence on severely affected sectors, such as tourism) or the reliance on external financial flows, including remittances, represent factors that will affect the outlook. In countries with high shares of informal employment, lockdowns have led to joblessness and abrupt income losses for many of those workers (often where migrants work far from home, separated from support networks). In that regard, Emerging Markets are much more vulnerable, all the more since targeted support – such as wage subsidies for furloughed workers, cash transfers – cannot be deployed as easily as in DM and health care systems have very limited resources.

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