Economic growth disrupted by Covid-19
The recent decline in risk assets follows several quarters of financial market gains and stable economic growth. The sudden spread of the Covid-19 virus, closely followed by the collapse in oil prices are the main the main culprits disrupting economic growth and investor confidence. As a result, this updated forecast leads us to anticipate subdued global growth in 2020, but we expect a recovery in 2021 as fears of Covid-19 diminish.
Sharp sell-off in stocks reduces valuation risk
Global equities have declined sharply as the Covid-19 outbreak and the collapse in the oil price pose a new threat to corporate profits and investor confidence. Historically, market reaction to crisis events tend to be short-lived, as long as the shock doesn’t cause sustained and meaningful harm to the economy. While the sell-off has lowered equity prices and alleviated valuation concerns, a lack of clarity surrounding corporate profits means a wide range of potential outcomes is possible.
Bond yields plunge to unsustainably low levels
In this environment of heightened uncertainty, investors have flocked to safe-haven government bonds, sending yields to historically low levels that are unlikely to be sustained. While yields are being suppressed more recently due to the impact of Covid-19 on investor confidence in a time of stress, we expect that investors will eventually demand a real, or after-inflation, return on their savings.
Executive summary
New sources of uncertainty have disrupted financial markets and undermined economic growth prospects. There is no question that many different pathways now exist for the global economy, and some of these could lead to recession. However, a coordinated response by central banks and politicians, the fact that past health scares have proven temporary, and the massive repricing of assets that has occurred over the last few weeks encourages us to maintain a moderately constructive outlook.
Economy
The Covid-19 outbreak and subsequent collapse in oil prices disrupt economic growth. Global growth is now anticipated at a new low of 2.9%—though recovery is expected to follow as concerns eventually subside.
Fixed Income
Many central banks, including those in the Canada, the U.S., Australia and China have reduced interest rates, while bond yields drop to record lows.
Equity Markets
Concerns around Covid-19 pose risk to corporate profits, leading to a decline in global equities. With lowered equity prices, stocks are an increasingly attractive option for investors.
Asset class commentary
The recent decline in risk assets followed several quarters of financial market gains amid stable economic growth, supported by improved financial conditions and central-bank stimulus. An assortment of geopolitical risks remain, but the sudden spread of the Covid-19 virus, closely followed by the collapse in oil prices are the main culprits disrupting economic growth and investor confidence.
