Investors’ big test is to look beyond Coronavirus related issues — but that is far from easy.
The answer to Coronavirus is testing, but investors now face their biggest test in years
I have learned one positive thing about Coronavirus this morning, but alas have had one of my biggest fears confirmed.
First the good news, Bahrian, which seems to be winning the battle against the virus, is the world leader in testing the virus — 4,910 tests per million people. That’s the example all governments must follow. To win this battle there must be more testing, a lot more.
The more worrying news relates to a little test I set — ‘the moment someone really famous, I mean someone we have all heard of, gets the virus, is a moment to feel very concerned’. So when I heard that Tom Hanks has the condition my heart sunk. I believe the virus is more widespread than we realise.
In such times, and we are all concerned, maybe we are all a little scared, it is so difficult to look beyond Coronavirus related issues.
The economy is going to tank. I don’t know whether there will be a global recession because I don’t know how long this crisis will last. I am pretty sure global GDP will contract in Q2. For global recession, there would need to be a contraction in Q3 too, and I have no idea whether the virus will have receded by then.
We now know that in November and December last year and January this, UK GDP grew at zero per cent, compared to the period three months before. So the UK was a whisker from recession before the virus struck.
We also know that the housing market was in recovery mode until very recently. The latest Residential Survey Market from the Royal Institution of Chartered Surveyors, out this morning, rose to its highest level since 2016. It seems highly likely the index will now drop back, but I am assuming once the virus recedes, the housing market will recover strongly.
Negative cost of money
The yield on government bonds has crashed. For the first time ever, the yield on all US Treasuries is less than one per cent. The yield on some UK government bonds is now less than zero.
With the cost of government borrowing that cheap, it would be madness for the government not to borrow and spend. That the chancellor has done this doesn’t make his first budget a great budget, it doesn’t make Rishi Sunak a great chancellor, rather it makes him the man who presided over the Treasury at a time of extreme conditions.
But does this mean yields will shoot up again once Coronavirus recedes, or did the virus merely accelerate something that was happening anyway? Even before we knew about the virus we knew interest rates were on a downward trajectory and that government borrowing had become absurdly cheap.
For me, it is simply staggering that throughout the entire 12 years since the last big crash, interest rates have remained close to an all-time low. I guess you would get bored if, every day, I wrote an article on interest rates still being close to a record low, and yet for me, every day since 2008, this has been the biggest piece of economic news.
At some point, we must ask the question why? Why have we seen such low interest rates without a corresponding rise in inflation? I am a big fan of the idea of a global savings glut, and suspect that the long run solution will be for governments to print money and use that to fund universal basic income, but let’s not get ahead of ourselves. I don’t want to start making long-term predictions when, right now, it is so hard to tell the difference between Coronavirus related effects and longer term trends.
As for the oil price, with the Saudis and Russians at loggerheads, the oil price seems to be on a one way street downwards. But will it recover eventually or are we close to the point when the combination of renewables and energy storage, both of which are falling in cost at an exponential rate, mean that old king oil is in any case dying. Or, am I reacting to Coronavirus and failing to see beyond the panic?
Personally, I think the Coronavirus is set to spread much further yet. Globally, the increase in its spread seems to have slowed, but the data on global infection is distorted by the virus spread in China and South Korea. In Europe and the US I think it will get a lot worse. In the UK, the doubling every five days exponential rate seems to be intact.
We can say that even before Coronavirus (that’s BC), a massive government infrastructure spend seemed imminent in the UK and US, and should be set to follow in the Eurozone. We are set to see a building age, and construction companies like Balfour Beaty, Kier Group, Galliford Try Plc and Morgan Sindall could be big beneficiaries.
I also note that on the BBC this morning someone said ‘invest in China’. In saying that, I am sure they were not influenced by my words here, but my words did suggest precisely that. My view has not changed in that respect.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees