Ivy Economic Insights
Commentary as of March 30, 2020
At Ivy, we are framing our ongoing analysis of the volatile investment landscape as a function of three main factors: 1) public health impact, 2) macroeconomic impact and 3) market impact. What is your view on the economic impact, and has it changed?
Derek Hamilton: The economic impact of COVID-19 continues to be uncertain. Currently, three-quarters of the U.S. population is in a partial or full lockdown. As I discussed last week, we have significantly lowered our forecasts. In the U.S., on an annualized basis we are penciling in a quarter-over-quarter contraction of more than 20% in the second quarter. For the year, our base case (around 60% probability) is for U.S. GDP to record a negative print of 2% to 2.5%. Meanwhile, globally, we are now forecasting GDP growth to fall by roughly 1%. Given the uncertainty around COVID-19, risks to our growth forecast are tilted to the downside.
On the policy front, I think central banks and governments globally are aligned to help cushion the economic fallout from the outbreak. In the U.S., the Fed cut interest rates to between 0% and 0.25%. In this situation, fiscal policy is more effective, which is why the U.S. passed a $2 trillion policy package. The fiscal stimulus will allow the Fed to act as a commercial lender as the package provides $400 billion, which can be levered 10 times, for the Fed to lend directly. In the future, we might get more help for small and medium sized enterprises and extension in unemployment insurance.
We are closely watching the implementation of the fiscal stimulus and the evolution in the Fed’s policy. Moreover, we are analyzing economic data to evaluate the depth and breadth of the economic impact the outbreak might cause. Longer term, we are analyzing how consumption and policy would evolve and change as economic activity normalizes.
Mark, what do you see being priced into global bond markets?
Mark Beischel: We've gone through various stresses in fixed income markets including in U.S. Treasuries, commercial paper and credit spreads. The Fed has taken measures to shore up liquidity and ease the stress. To ease the stress in U.S. dollar funding, the Fed beefed up swap lines with several global central banks. Furthermore, as part of the fiscal stimulus, the Fed will support and release stress in the financial markets by directly buying. Overall, the Fed has responded quickly, powerfully and efficiently. The response has been remarkably quicker than the monetary response during the 2008 – 2009 financial crisis.
One last thing is the volatility in the oil market. While it hasn't been getting as much attention as COVID-19, the disinflationary environment will have a big impact on various countries, depending on whether they are a producer or a consumer of oil.
Could you touch upon the global landscape and how other countries, such as China, that were at the front end of the virus outbreak are now fairing?
Derek Hamilton: In China, economic activity has reached 80–90% of pre-virus levels. As has been reported, there have been no new domestic COVID-19 cases; all new cases have been imported from people who have traveled from outside the country. Outside of China, I believe we are yet to see a peaking in cases.
Mark Beischel: In the past few weeks, credit did poorly (until before the Fed started buying). One country that we are watching is India where we are evaluating the impact of the countrywide lockdown. In India, we are interested in the banking sector. Meanwhile, our participation in Europe is light as we don’t feel there is a ton of value there because of suppression of credits spreads due to the ECB action.
In the U.S., investment grade may perform better than high yield. The latter is not in the Fed’s buying program and might underperform its higher quality peers. We have already seen $85 billion worth of fallen angels (companies that have fallen into high yield from investment grade) and I believe that the trend is likely to continue.
What is your outlook on the global currency?
Derek Hamilton:The U.S. dollar generally outperforms in two types of situations. First, when it is a global risk-off environment, i.e. when investors fear for global economic stability and thus invest in the U.S. dollar as a haven currency. Second, the U.S. dollar strengthens when the U.S. is growing over and above the rest of the world. Currently, we are in the first situation and I believe the U.S. dollar may outperform. Furthermore, with the lockdown in emerging markets such as India, we are in unchartered territories and we don’t know the impact this may have on emerging markets’ financial markets and currencies – in my view, it could very well lead to weaker emerging market currencies.
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Past performance is not a guarantee of future results. The opinions expressed are those of Ivy Investments and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
Risk factors: : Investing involves risk and the potential to lose principal. Fixed-income securities are subject to interest rate risk and, as such, the value of such securities may fall as interest rates rise. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.