13 min read 7 Apr 20
Summary: In this month’s video Ritu Vohora, Investment Director, looks at the record levels of support from central banks and governments, and asks could the pandemic prompt an alteration in the capitalist model and act as an agent of change in improving corporate governance and accelerating the trend towards longer-term sustainability?
As the COVID-19 pandemic continues to spread, governments around the world have taken tough measures to try to limit the tragic loss of human life. It is a challenging time for families, healthcare workers, financial markets and the global economy.
Every major asset class was disrupted in the first quarter. Global equities were down as much as 34% from February’s highs – marking the worst first quarter on record. The MSCI All Country World Index fell almost 14% in March, the third worst month on record. Market price behaviour settled down towards the end of the month, as hoped-for stimulus measures began to ramp up. The monetary and fiscal response to the crisis has been unprecedented, in both magnitude and pace.
During the month, Japan fell the least, while Emerging Markets and Europe, now the epicenter of the virus, fell the most. The S&P 500 suffered its quickest fall into a bear market on record, ending the longest-ever bull market. All sectors posted negative returns, in US dollar terms, but defensive sectors, such as healthcare and consumer staples fell the least.
Oil prices tumbled to their lowest levels in 18 years, hit by the dual shock of the biggest demand drop in history and a supply surge following the start of a price war between Saudi Arabia and Russia. Government bonds were also severely shaken, as investors dumped their highest-quality government bonds, along with riskier assets, in a dash for cash. A scramble for US dollars, saw the greenback clock up its sharpest rise since the financial crisis.
The world is in a critical state as the pandemic continues to spread. The speed and scale of the emergency has taken everyone by surprise. Co-ordinated global action is necessary to contain the pandemic and protect livelihoods, as well as cushion economic and financial consequences. As activity slows, a sharp contraction in growth is all but guaranteed.
Global central banks have shown they are willing to do ‘whatever it takes’ – announcing policy rate cuts and significant amounts of asset purchases. Whilst their actions have calmed markets and provided liquidity, economic stimulus or rather, ‘income maintenance’, is needed to put money directly in the hands of people and small businesses. The onus is falling on governments and fiscal policy to soften the economic blow. The US, UK, Europe, Japan, China and India are unleashing trillions of dollars in government spending and newly-created money, as they desperately attempt to keep the global economy from sinking into a depression. Commitments from governments and central banks to date, are close to $7 trillion.
What makes COVID-19 such a fundamental economic challenge is that it is assailing the core institution of capitalism – the labour market. To preserve public health it is essential to impose restrictions on labour and enforce social distancing. Keeping businesses alive through this crisis and making sure workers continue to receive their paychecks is critical. But government hand-outs and fiscal re-distribution were, up until now, only proposed by more left-leaning economists. Could the crisis be a chance to redraw the line between business and society? Could this prompt a change in the capitalist model that has driven globalisation and increased income inequality?
Sustaining the operations of good businesses, and supporting employment, is in our collective interests. Record levels of support from governments, however, demands that businesses play their part as good corporate citizens. Companies need to balance protecting their employees, staying solvent and addressing wider stakeholder responsibilities.
Just a few weeks ago, the changes we’ve seen in the face of coronavirus would have seemed radical. In the UK, a Conservative government is effectively nationalising parts of the private sector, while paying most of the wages of workers in lieu of their employers. Luxury goods production lines are being reoriented – with Louis Vuitton owner LVMH, using its perfume lines to make hand sanitiser. Fine dining companies are moving to home delivery, and grounded flights have contributed to cutting pollution by 50% in just a month.
The pandemic has created an urgent, unprecedented opportunity for corporations to put the promise of purpose-driven leadership into practice. Companies face extraordinary operational and financial challenges, with every industry and business being tested in unique ways. Many companies have already stepped up to support their workers, customers, and local communities.
For example, PepsiCo is investing up to $11 million to provide food, water, and other critical support to global communities affected by COVID-19. Microsoft, Alphabet and other tech companies are committing to pay their hourly workers normal wages, despite a slowdown in operations. Some airlines, however, have drawn criticism for laying-off staff and seeking bailouts, despite having previously used free cashflow to buy back their own shares.. In the UK, banks have been told to hold off paying dividends and cash bonuses to top staff over the next few months to free up capital, and take on a societal role as agents of the government.
Rather than view this as a crisis of capitalism, perhaps we should look at this not only as a case of hugely effective public intervention, but possibly as an agent of change in improving corporate governance and accelerating the trend towards longer-term sustainability in the private sector.
The global recovery effort will require business, government and society to work together. Creating value for stakeholders, not just shareholders seems a viable thing to do. The state should be compensated for the support provided while sharing in the gains from a recovery, and changes in corporate governance and behaviour should be consistent with longer-term societal and environmental goals. When this crisis is over, we will have survived an existential threat through unprecedented global collaboration, discipline and actions showing the best of humanity.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.