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Global Markets Overview: COVID-19 Scenario updates

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COVID 19 Coronavirus

By David Hoile | July 20, 2020

How do we manage economic, business, and investment risk given such high unpredictability?

To understand the range of possible impacts of COVID-19 on economic, business and financial market conditions in 2020/21 we use three broad economic scenarios. These seek to manage unpredictability and uncertainty by identifying the main epidemiological and public health policy indicators and the main economic policy and economic activity measures. The three scenarios are:

  • A global economic recovery in Q3
  • An extended global recession
  • A wide-scale credit squeeze and defaults

When faced with a risk that is unpredictable, multi-faceted and potentially large, we suggest using an approach that considers the various risks in an integrated way. Different risks will be more important for different asset owners and businesses.

Under our outlook, which suggests that the first two scenarios are most likely, investment risk and opportunity should look to three main areas:

  • Liquidity risk: central banks around the world have committed to do “whatever it takes.” Nevertheless, we expect a tightening of liquidity in financial and broader credit markets – we are tracking various market liquidity metrics to gauge whether liquidity is improving or becoming more strained;
  • Credit risk: if liquidity stresses in the financial system and funding stresses in the real economy significantly escalate this can turn into credit or solvency risk – we are also tracking various epidemiological and economic indicators to assess whether strains on Wall Street and Main Street are likely to increase or decrease;
  • Market risk: what can investors do? Reassessing risk tolerance or risk appetite is one course of action. More directly, we recommend rebalancing as the default course of action unless you think that there has been a long-term change and markets do not recover in the next one to two years. Finally, ensuring you have appropriate geographical and asset class diversification will help to manage the risk from a COVID-19 downside shock, given the virus would have a very specific geographical effect.
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Global Markets Overview June 2020 PDF .2 MB
Our Scenarios - 15 July 2020 PDF .2 MB
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