In light of the rapid spread of the epidemic, European countries have confined people to their homes
- Economies will slow down
- Financial markets are on the verge of collapse
- Central banks and government will implement measures to boost the economy, but it is too soon to determine whether those will be sufficient
- In this complex environment, liquidity management is essential
ENTERING UNCHARTED TERRITORY…
Governments and citizens from western countries have clearly entered uncharted territory. It took Europe a few weeks to realize that it was going to experience the unprecedented experience of severe containment, on the scale of a large part of its population. The health battle to control the spread of the virus and contain the human toll has no other alternative.
WHAT ARE THE CONSEQUENCES?
Financial markets are taking a major hit, proportional to the current economic uncertainties. The economy will be almost completely shut down for the weeks to come and impacts on growth, households and businesses are extremely difficult to estimate.
IS THE CRISIS SIMILAR TO 2008?
This crisis is radically different from 2008 but it will also lead to a global recession. Political and financial responses of last week and this weekend do not allow us to refine our figures on this point, however we can have a confirmation of the commitment of states and central banks in the management of this economic crisis. Central banks, sometimes hesitant by nature, will quickly point out that their interventions have no limit in terms of size. Moreover, measures to support economy announced by major European countries are already important, others will come and we already know that national budgets will be used massively to offset the recessive effects of this crisis.
As in any unprecedented situation, the uncertainties are major for the economy. Financial markets need to take this into account and the result is colossal volatility. But markets are also concerned about liquidity risk, which can sometimes be more dangerous than the economic risk itself. The combination of these two risks implies very low visibility in financial markets, regardless of the asset classes considered.
For our part, beyond the unchanging objective of protecting the performance of our funds, we are now paying particular attention to this liquidity risk on our whole range.
Completed by Jean-Luc Hivert, Global Chief Investment Officer of LFAM, March 16, 2020