The Beginning Of The End?John Leiper - Head of Portfolio Management - 3rd April 2020
Yet despite all that, and as shown in the chart below, the S&P 500 remains in a long-term uptrend. This trend has existed, uninterrupted, for over 70 years having endured the 2007-2008 financial crisis and 1973-1974 oil shock.
This presents an opportunity to re-position the portfolios.
Large global events inevitably lead to change, and with change there will be winners and losers. The winner from the coronavirus thus far is China.
If the official numbers are to be believed (something questioned by US intelligence officials (Bloomberg), the number of cases and deaths in China remains extremely low. As a result, economic activity is returning to normal and Chinese assets are outperforming the rest of the world.
Why have Asian countries suffered less from the coronavirus?
This is a difficult question to answer. But three potential reasons stand out:
The first is superior policy implementation. Simply put, Asian countries are better suited to dealing with global pandemics than other regions because they have experienced more of them. Prior crises brought temperature monitoring devices to airports and governments monitored mobile phone data to reduce the spread of the virus.
The second reason is herd immunity. The Sars outbreak of 2003, to which many Asian populations were exposed, was caused by Sars-CoV. The current outbreak, COVID-19, is caused by Sars-CoV-2 and therefore Asian populations may have some degree of built-in immunity.
Thirdly, certain Asian hospitals appear better funded and more adequately prepared to handle the virus than other healthcare systems.
If Asian economies can ride out the coronavirus better than their western peers, then the fall in economic activity will be less severe and the recovery quicker.
What about the longer term?
Dramatic events bring dramatic change. The big question is how long it will take to beat the coronavirus. The longer it lasts, and the greater its impact on western countries relative to Asia, the greater the probability the coronavirus will act as a catalyst for the decline of the US and rise of China as the next hegemonic power.
This battle is already raging. It is why Donald Trump imposed sanctions on China and accused them of intellectual property theft.
The answer to this question comes down to economic power and currency. The US is the strongest economy in the world. As such it enjoys the “exorbitant privilege” of having the global reserve currency, the US dollar. This is a huge advantage to the US economy.
However, nothing lasts forever. The US took the mantle from the British in 1945, following the devastation of the second world war. Before that, it was the French, who dominated Europe from the early 1600s until the Battle of Waterloo in 1815.
China is next in line. The country has contributed the most to global economic growth since 2008 and in 2015 the International Monetary Fund named the Chinese yuan a global reserve currency. Further, a growing number of countries including China, Russia and the European Union are increasingly looking to move away from the US dollar: (CNBC)
The ultimate transition from the US to China probably remains a long way off. Since becoming President, Donald Trump has eschewed the foreign policy of prior Presidents and aggressively asserted a form of US nationalism. The immense monetary and fiscal fire power we saw last month will likely keep the US on top for the foreseeable future.
However, the “exorbitant privilege” the US enjoys from the global reserve currency has now morphed into an “exorbitant burden” as the Fed is forced to do all it can to support the global economy. This is shown in the chart below which shows the level of purchases under QE4, which now matches the financial crisis in 2008.
The US dollar is already overvalued. Since the 1960s the US dollar has moved in 17-year cycles, rising and falling in value relative to a basket of developed market peers. We are now at a point in the cycle where the currency is likely to depreciate over the coming years. This cyclical tendency will coincide with the afore-mentioned policy specifically designed to weaken the dollar. Given the correlation to US equities, this would signal an end to US equity outperformance as the rest of the world, led by China, catches-up.
This uncertainty has caused ruptures across financial markets. What is required, to break the deadlock, is clear visibility that the end is in sight.
With that in mind, the following interview, published Thursday evening, is very positive (skip to 5 minutes): Foxnews.com.
In the interview Stephen Smith, the founder of the Smith Center for Infectious Diseases and Urban Health claims to have made a breakthrough using hydroxychloroquine on infected patients.
In his words, “I think this is the beginning of the end”.
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