Despite the clearly tragic short-term impacts of the coronavirus, could the outbreak be an unintended agent of change? In this month’s video, Investment Director, Ritu Vohora looks at the potential silver lining amidst the fear and the value of ESG to long-term investors, providing an important and alternative perspective on major issues affecting markets and economies today.
Fear has returned to the markets with a vengeance, as the coronavirus outbreak dominates the narrative.
The last week of February saw the largest sell-off in global equities since the financial crisis in 2008. Concerns about the rapid spread of the virus outside of China, caused one of the quickest S&P500 corrections, since the Great Depression in the 1930s.
The longer-term economic fallout remains the big unknown. The number of new cases in China appears to have slowed, but in Europe and elsewhere they continue to rise. There are two sources of economic disruption – the demand side – with some obvious victims being airlines and hotels, and the supply side – given complex, integrated, global supply chains. Equity investors are starting to consider what this means for global trade and travel, while bond investors are worried about the spread of the virus leading to a global recession.
Global equities finished the month down, with the MSCI All Countries World Index falling 8.0%, in US dollar terms – its worst monthly return since May 2012. As concerns about the virus spread across Japan, Europe and the US, developed markets underperformed emerging markets. Europe lagged, as the virus spread rapidly across Italy. The UK was the worst region, as Mark Carney cautioned UK growth could be hindered by the virus.
Brent crude was the worst performer, falling 17% from its mid-month high point. Safe-havens, US 10-year government bonds, German Bunds and the US dollar, were the only bright spots, as investors sought to immunise their portfolios. US Treasury yields hovered around record lows, as investors looked to central banks to help cushion the economic hit to growth.
The short-term impact of the virus on the global economy is inevitable. The longer-term influence, however, is less certain. Could the virus lead to a permanent shift of supply chains and logistics? The epidemic comes at a time of growing societal unrest, trade frictions and a rise in populism. The spread of COVID-19 highlights the pitfalls of greater global interdependency and the challenge for global governance. Governments need to balance health, economic and social imperatives on the back of uncertain and evolving information. They also need to accommodate human behaviour. With technology and agile-working policies allowing more people to work at home – could remote working become the norm?
Despite the clearly tragic short-term impacts of the coronavirus, could there be an encouraging outcome over the longer-term? In particular, might there be a silver lining to the outbreak for China and the world’s sustainability ambitions? The UN’s 17 Sustainable Development Goals, are an urgent call for action by all member countries. They recognise that ending poverty must go hand-in-hand with strategies that improve health and education, reduce inequality, and spur economic growth – while tackling climate change and preserving our oceans and forests.
China has made phenomenal progress in areas such as poverty alleviation, sustainable agriculture and renewable energy, but its size and complexity make realizing its sustainable development goals challenging. COVID-19 could be an unintended agent for change. Ensuring healthy lives and promoting well-being is essential to sustainable development. The virus has exposed the limitations of China’s healthcare system. While building two hospitals in ten days is an astonishing feat, the epidemic has hopefully shone light on China’s creaking health sector, which needs greater engagement and efforts to eradicate a wide range of diseases and emerging health issues.
China’s recent decision to fast-track a ban on the trade and consumption of wild animals is a direct response to the coronavirus outbreak. According to the World Health Organization, almost three-quarters of all epidemics in recent decades have spilled over from animals. This temporary ban could be a step towards a permanent one, which would be a huge boost in the global fight against the illegal trade.
Climate change is also at play here. The measures taken to curb the spread of the coronavirus have caused greenhouse gas emissions to plummet in China. NASA and European Space Agency pollution monitoring satellites have detected significant decreases in nitrogen dioxide, a noxious gas emitted by cars, power plants and industrial facilities, over China between January and February. The change is at least partly related to the quarantine following the outbreak. While it also indicates the economic damage being done to China’s economy, it shows a glimpse of a future with reduced emissions. China is the leading source of greenhouse gas emissions in the world. While emissions are only temporarily subdued, and will likely ramp up when activity resumes, this could prompt the Chinese government to reflect on the structure of its economy and its efforts to become more sustainable.
Quarantines, not just in China but globally, have also required many employees to work from home. This has inadvertently forced many companies to rethink how they work to remain productive. More effective use of video and teleconferencing could help companies review their travel policies going forward. This not only helps save time and money, but decarbonization goals.
Shocks such as epidemics often expose global companies to vulnerabilities. COVID-19 may serve as another reason – besides protectionist regulations and mounting consumer concerns, about working conditions and sustainability standards – for companies to reassess their supply chain exposure.
Furthermore, the epidemic highlights that global collaboration remains a much-needed asset – the world needs governments and businesses to work together, toward a common goal. Businesses that invest in strategic, operational and financial resilience to emerging global risks will be better positioned to respond and recover. This highlights the value of ESG to long term investors in providing an important and alternative perspective on major issues affecting markets and economies today.
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.