Four Important Points on Coronavirus and the Global Economy | Lord Abbett
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Economic Insights

Updated views on the potential economic impact of the outbreak that has reached nearly three dozen countries.

Given the accelerated spread of coronavirus in regions outside China, and the rising toll from the disease, global financial markets saw heightened volatility on February 24, with additional selling pressure evident the following day. We have already written about the potential impact of the virus on the global economy, and will continue to monitor developments as the situation unfolds. Based on our current observations, here are four additional points to consider:

  1. Uncertainty remains very high because it is unclear to what extent the virus will spread. This is due to its highly infectious nature and, potentially, asymptomatic contagion. We believe it is already a pandemic and likely will spread beyond the 37 countries already affected.1
  2. The hit to global economic growth will be determined by the severity of the measures taken to contain the spread of the virus as public health authorities and political leaders struggle to respond to the threat of widespread infection. Estimates of the economic loss in China are highly uncertain at the moment but appear severe.
  3. Investors in China have responded very positively to government pledges to deploy stimulative monetary, fiscal, credit, and regulatory measures to offset the loss of GDP and prevent a negative macro dynamic from developing. The stock market2 had plunged 13% from its recent high on January 13 but was back within 2.8% of that level as of February 25. Thus, investors appear to have been willing to look through recent disruptions and focus on longer term outcomes.
  4. With fewer policy levers and less ammunition than China, and, perhaps, less willingness to respond early and aggressively, other countries may be more vulnerable to secondary drags on growth following an initial downside shock. If the aftermath of the 2008-2009 global financial crisis is any guide, China responds to exogenous shocks to growth much more aggressively than other countries.

That final point is worth expanding on. We made an observation in our previous commentary that bears repeating: While combating the spread of this dread disease remains a challenge for governments around the world, we think it’s important for investors to remember that policymakers do have tools to blunt the impact of the outbreak on economic growth. China’s rapid rebound and the stimulative measures available to policymakers in other countries should remind us that while volatility can be disconcerting, especially on the downside, we believe it’s important to rebalance portfolios back to target asset allocation weights in order to take advantage of temporary dislocations. We believe that discipline is essential to maximizing risk-adjusted returns in the long run.

 

1Based on data from the U.S. Centers for Disease Control and Prevention as of February 25, 2020.

2As represented by the SSE Composite Index, a stock market index of all stocks that are traded at the Shanghai Stock Exchange. 

 

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