The virus turning into a pandemic is a nightmare already, and the global economy is in an extraordinarily precarious place right now. There is widespread contraction of global economic activity. The question is how to respond and once we are able to hopefully contain the virus, how do we move ahead after the worst is passed. When you are in the middle of something like this, it is very difficult to have prospective. Yet, we actually need to do that as well at this precarious point in time.
What will act as a green light or a circuit breaker for markets: will it be medical news or the fact that globally governments are now stimulating economies? Is that going to give confidence to financial markets that liquidity is back and governments currently are bothered about the meltdown?
I think the green light has to come from science, rather than from aggressive actions by central banks. What worries me is that central banks and market participants are viewing the current situation through a lens that is similar to the one we used to view the global financial crisis of 2008 and 2009, when monetary authorities did come to the rescue and put a bottom on markets. This is not a financial crisis. It is a global pandemic, the containment and mitigation of which is causing major problems in real economies. So, central banks are secondary rather than primary responders to the problem. We need expeditious, creative and massive fiscal actions aimed largely at virus containment. You asked for a green light. It will come when there is clear evidence that we have got the infection rate under control, and we are a long way away from that right now.
I have spoken to some of the old timers on Indian stock markets and even on Wall Street and they are admitting that they have never seen this kind of a carnage before. The wealth destruction is not terrible, but horrible. What happens now? Are we in for a multi-year deep recession, where globally growth is going to contract and financial markets are not pricing in this kind of a contraction in growth and earnings?
I think this sharp decline in markets is obviously a worrisome extra ingredient of the fear and panic that is gripping individual and institutional investors. I would view this as a derivative of the health crisis, and not as the primary source of instability. The markets were blissfully surging ahead in 2019 and in the first seven weeks of 2020 at an unsustainable rate. So I personally believe the sharp dislocation of the markets reflects a reaction to this excessive surge as much as anything else. We are back down to levels or near the levels that we were seeing in late 2018. But a fair amount of wealth still remains in the system and that should be supportive of investors.
Since financial commentators and data watchers are comparing 2020 with 2008 and, even worse, 1987, how different is the shape of world right now. Frankly, the good news is that there is lot of liquidity in the system. Central bankers are aware that a financial dislocation or price dislocation will lead to a crisis. So what is next? Are we looking at a debt market crisis, which could be fuelled by CDR and CDS spreads, or do you think financially this problem will get contained, we just need to worry about the medical implications not so much so about the financial implications?
One thing I have learnt in my 45 years in markets is that the next crisis will never be like the one that proceeded it. We always come out of a crisis, whether it was the Asian Financial Crisis of the late 90s, the dotcom bubble of the early 2000, Global Financial Crisis of 2008 and 2009. We have come out of these crises with an aim to fix the problems that got us into that particular crisis. But they are not general enough to forestall the inevitable next crisis. No one, of course, thought that there would be a global pandemic. So, we went ahead with globalisation focusing on maximising the interconnect in these global economies through a massive expansion of global trade, adding in the supply chain or the global value chain piece to turbocharge trade.
All we wanted was low-cost goods irrespective of what those cost efficiencies entailed in terms of investing in public health, or I would also say investing in environmental protection and the quality of the climate. I am really hopeful that as painful as this period is, we learnt some very important lessons that we need to invest much more in the quality of our global economy, rather than just in the speed or the quantity of global growth. But that remains to be seen.
With each crisis, the shape of the world is changing. When the TMT bubble got pricked in 2002, money moved to emerging markets. So when the dust settles, what do you think the new shape of the world would be: which sectors and companies would take a back seat and which ones will emerge dominant forces or dominant businesses to associate with?
I think the world is going to come out of this in a very precarious way. There is going to be a lot of fear of interaction among each other within individual nations, but also on across borders. There will probably be some finger-pointing across borders as to who is responsible for this. I think there is going to be a deep rethink about our commitment to globalization, which is unfortunate. Because in many respects global commerce and global linkages are really important aspects of boosting human condition around the world in leading to poverty reduction and developing linkages that can benefit us all. We need to pay greater attention to the way we forge these linkages. We are going to be in a period of being wary of these global linkages for quite some time to come.
The last thing the world wants is a war between two of the largest oil producing countries: Russia and Saudi Arabia. At a time when the world is crying for growth, two oil producing nations are fighting. What could be the second derivative impact of the crude selloff, because oil companies are large borrowers from banks? If oil prices stay subdued, it could create an NPA or bad loan problem for global banks, especially US banks, which have exposure to oil directly or indirectly?
This is a really unfortunate aspect of the current circumstances. The virus itself is bad enough and then they have large producers engaged in a reckless and irresponsible price war at a time of global crisis. It is really an unforgivable sin on the part of Russia and Saudi Arabia. Are they not citizens of this world being impacted by this global pandemic? And yes, while we know that lower energy prices are helpful to support energy users, consumers in terms of their home heating and driving expenses, consumers are in a mood to take advantage of these price breaks. Meanwhile, there are repercussions to producers such as shale industry in the US and the associated linkages to their lenders and credit markets that are underwriting or have underwritten their debt. This adds a new element to an already precarious situation. Enormous pressure needs to be put on both Saudi Arabia and Russia to put aside their differences to support the world in which they also inhabit.
China has been the producer/factory of the world and they have also been the biggest consumer of the world. I have been told that nearly one-third of the total global growth is directly or indirectly coming from China. Now that engine is going to stop humming. What implications do you think will this have on commodity prices, on global demand, on consumer demand and also supply chain disruption?
China has accounted for 37% of the cumulative growth of the world economy since 2008. Their growth has come from both production and consumption sides. China is midway through a major shift in the structure of its economy from becoming the world’s greatest producer to an emerging middle class-driven consumer. China needs to figure out a way to stay on track with that critical transition. Else, its development aspirations could be jeopardised in the years ahead. China is dealing with a crisis like the rest of us, and many of the reforms that will be required to support that transition are going to be on hold. But a re-commitment to that transition would be absolutely essential once this crisis runs its course.
How should one cope up with this selloff? Is it time to construct and go against the crowd and start investing or should one be cognizant of the risk in the world? Right now, risks are real and if what happened in 2008 is repeated, that means the downside could be still 25-30%?
This is not a typical financial shock where investors can just move in at the bottom with great confidence, sweep up bargains and engage in the sort of well-worn ‘buy the dip’ strategies. I think this is a time to really think about. As I said earlier, the companies, sectors, segments of economic activity should really focus on what we need to do better to improve the quality of global economic growth. So the trend toward ESG investing, the trend toward focusing on climate change — to say nothing of all companies engaged in scientific research and public health infrastructure — are going to be really important areas to think about for long-term investors. I would caution against indiscriminate use of the buy the dip strategies in this period.
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This is not the usual buy-on-dips market: Stephen Roach have 1872 words, post on economictimes.indiatimes.com at March 18, 2020. This is cached page on Health Breaking News. If you want remove this page, please contact us.