Six forecasts after six months under coronavirus

Much uncertainly still surrounds the novel coronavirus and its economic impact.

A man stands in front of an electronic board displaying market data at the Tel Aviv Stock Exchange, in Tel Aviv, Israel (photo credit: REUTERS/BAZ RATNER)
A man stands in front of an electronic board displaying market data at the Tel Aviv Stock Exchange, in Tel Aviv, Israel
(photo credit: REUTERS/BAZ RATNER)
After six months of experience with the pandemic, it is still unclear to scientists what is the outlook for COVID-19 in the coming months. Coronavirus has been the “Black Swan” of this year. Epidemiologists, including the best of them, have difficulties attempting to predict the outlook for our coming winter season. Not a long time ago, the consensus forecast was that there might be a second wave of infections sometime around October-December, i.e., the winter season. Yet the pandemic produced a big surprise, and the second wave has already arrived. There is also great uncertainty about how and when a treatment and vaccine will be developed to deal with the virus. My first forecast, hence, is that COVID-19 will not disappear soon and we will see in the coming months zigzags of in the degrees of contagion, imposition of quarantines, and overall confidence.
In most countries, economic activity can be expected to continue to depend on the outlook for the pandemic. Fiscal and monetary policy have reacted quickly and avoided a 1929-type crisis. Furthermore, the mere credible knowledge that they will do “whatever it takes,” in their own wording, in order to avoid major recession, provides confidence. The economic outlook will continue to depend on the virus outlook and on the existence and strength of quarantines. Interestingly, July was a month with lower quarantines than before in most countries, and the macroeconomic data for that month were quite encouraging, e.g., purchasing managers’ indexes. In sum, my second forecast is that deep recession is not a key macro forecast for the coming two years. Instead, there is room for concern about a possibility of very low, yet positive, growth, and some sort of muddling through in most economies.
Turning to financial markets, there should be no contradiction, a-priori, between the fact that we are experiencing a global recession and at the same time stock market indexes are reaching new historic records. A key fundamental driver of financial markets is expectations about the future. Apparently, markets are thinking of the current crisis as a temporary one, and one that creates new opportunities. At the same time, investments are strongly affected by the very low interest rates worldwide, a result of central banks’ expansionary monetary policies. There is wide agreement that life after COVID-19 will be quite different from life before. No doubt, this “new world” that is waiting for us will depend on technological changes much more than in the past. While I am a strong advocate of the tech sector, which had so far a stellar performance, my third forecast is that sooner or later there will be a market rotation into the more traditional sectors, such as industrials, financials, consumer markets and many others.
My fourth forecast is that uncertainty and changing sentiment about the results of the coming elections in the US will be a key driver of market volatility. Up until now, there seemed to be wide agreement that “US President Donald Trump would be better for markets than Democratic nominee Joe Biden.” Yet, as time has passed, we can see an increasing number of analysts that believe Biden could have a positive impact on markets and the economy. Obviously, there is also uncertainty about the extent to which the November elections will run in a smooth and well organized way. Any deviations form that will also be a source of market volatility.
Fifth, the existence of record high levels of liquidity held in the form of bank deposits and/or money market funds is a positive technical factors for the outlook of market performance. Obviously, with very low interest rates, the opportunity cost of holding a higher portion of portfolios in a “wait and see” liquid mode is quite understandable. As an illustration, there are $5 trillion held nowadays in money market funds in the US! Yet, once things become clearer in terms of the combat against coronavirus, and once credibility and confidence increase for investors, they could be more inclined to turn a significant part of these liquid funds into other assets, such as equities, and this in turn will help improve market performance.
Last, even under COVID-19 there could be some positive surprises, and as someone said, “expect the unexpected.” For us in Israel, the surprise news of a major breakthrough in talks with the United Arab Emirates about reaching an agreement about normalization of relations is extremely positive development. It could enhance commerce, trade, tourism and other activities. Not only there can be mutually beneficial trades between the UAE and Israel in the areas of technology and defense, but also this could mark the beginning of a new era in our area, one in which other countries will join the UAE in reaching similar agreements.
The writer is CEO of Peilim Portfolio Management.