Abu Dhabi, UAEFriday 5 June 2020

As lockdowns ease, global markets are eyeing favourable conditions ahead

Despite the pandemic, life must go on and the world economy is adapting to Covid-19

A woman walks past a bank electronic board showing the Hong Kong share index. Asian stock markets revived after the continent became the first to ease movement restrictions. Associated Press
A woman walks past a bank electronic board showing the Hong Kong share index. Asian stock markets revived after the continent became the first to ease movement restrictions. Associated Press

In less than six months, the Covid-19 coronavirus pandemic has created a new world economy, one that fuses state and private sectors and relies heavily on digital communication systems.

Until a vaccine is found, life goes on under astonishing new conditions. Country after country is finding ways to adapt and handle the risks of an outbreak by easing lockdowns stage by stage, making personal protective equipment (PPE) mandatory, banning travel and recommending remote work practices.

Combined with record low interest rates, investors have access to easy borrowing and are likely eyeing bargain price risk assets for profit-taking opportunities.

Hussein Sayed

Three months ago, a state offer of tens of millions of dollars to fund a factory to repurpose its production and make PPE would have been shocking. And yet, Canada did just that with a $50 million (Dh183.65m) fund directed to local industries.

In the US, pay cheque protection programmes are helping thousands of companies to keep their employees. Without those loans, the record 20.5 million unemployed might have been at least double that number.

In Saudi Arabia, VAT has tripled from 5 per cent to 15 per cent and a cost of living allowance was dropped, as the state turns to consumers to increase revenue made on sales.

Large state-owned enterprises, particularly in the fossil fuel energy sector, face enormous challenges because of shaky oil prices. This may accelerate diversification or privatisation programmes albeit with lower budgets. Initiatives that combine state and private sector forces appear set to become more popular, especially in the technology, digitalisation and health sectors.

State-owned enterprises are worth around $45 trillion, amounting to about half of global gross domestic product. These companies, which traditionally under-perform in comparison to the private sector, have come into their own.

In one example, Germany’s state-owned bank KfW bailed out travel company TUI with a €1.8 billion (Dh7.23bn) bridging loan so the company can survive until the economy recovers after lockdowns. In this way, the state prevents further unemployment claims weighing on its own resources.

Some state-owned companies active in the water, electricity and energy sectors actively support consumers. Bahrain, for example, initiated an $11.4bn stimulus package, which includes the payment of water and electricity bills for consumers and businesses for three months.

For the time being, other GCC countries have not increased their VAT rates in line with Saudi Arabia, but this could change in the future as states may seek to recover from their own losses as soon possible during a recovery.

To avoid sovereign debt defaults and burdens on the banking and financial sector, the state and private sectors may have to work even more closely together for the medium-term because a healthy economy stems from a healthy population.

Central banks, meanwhile, stepped in to help the private sector with record amounts of quantitative easing (QE), an instrument used in the 2008 financial crisis which proved useful to economic recovery.

The US Federal Reserve, for example, is relying on the strength of the country's financial system in early 2020 in its bid to cushion the economy from the pandemic. An important part of the Fed’s support measures is emergency funds to ensure that lending to businesses and households continues.

The Fed reports that bank revenue fell by 50 per cent in the first quarter but deposits rose as consumers held on to their cash, meaning that in general, the banking sector was able to stay above its liquidity requirements.

So, what does this mean for investment? As lockdowns ease and a recovery in consumer spending comes closer, investment markets appear to have favourable conditions ahead. Combined with record low interest rates, investors have access to easy borrowing and are likely eyeing bargain price risk assets for profit-taking opportunities.

The first weeks of May saw the first easing of movement restrictions and Asian stock markets revived fitfully amid better sentiment.

As one of the forerunners in easing restrictions, the world is now watching Germany. Early indications noted that the risk of Covid-19 persisted and the infection rate rose. The German authorities responded by locking down the areas where there were outbreaks, however, they appear to be staying on course to reopen the wider economy as quickly as possible as the country enters a recession.

Life goes on, and what a different life it is.

Hussein Sayed is the chief market strategist at FXTM

Updated: May 19, 2020 02:29 PM

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