Taal selectie

Pension funds

From Euphoria
to Anxiety

Pascal Blackburne & Luc Synaeghel 2020-02-01

How fast the mood can change in the space of just a few weeks. Having begun the new decade on a high note, financial markets have since had to contend with the spreading of the Chinese coronavirus, blatant US-Europe divergences on the subject of climate change at the World Economic Forum, the Brexit D-day and presidential impeachment proceedings in the US Senate. Still, from a fundamental perspective, the picture remains one of low interest rates and supportive government policies, meaning few investment alternatives to equities – for the time being.

The Chinese economy always tends to pause as it moves into a new year. This time though, its stalling is due not to holiday celebrations of the “Year of the Rat”, but to drastic quarantines aimed at containing the coronavirus outbreak. Without wishing to minimise health concerns and, especially, casualties, we do note that scientists generally view this virus as not being an acutely dangerous one, in terms of contagiousness and mortality. Why then has the Chinese government taken such radical action? We believe that it wants to demonstrate, to both its own citizens and the international community, that it has control of the situation. Also, in this world of “fake news”, the danger perhaps lies less in the coronavirus itself than in a potential panic phenomenon that could develop in the absence of strong official measures and communication.

Assuming the coronavirus outbreak peaks mid- to late-February, the hit to Chinese full-year GDP growth from these weeks of virtual standstill in (external and internal) trade can be estimated at ca. 0.5%. First quarter GDP growth is likely to come in at ca. 4%, while full year growth should end up below 6%. Needless to say, financial market participants are already taking into account additional monetary and fiscal support by the Chinese authorities.

Meanwhile, at the Davos gathering of global leaders, climate change was by far the dominant topic. But, just as was the case a couple of years ago regarding income inequalities, even though the problem is now widely acknowledged (save by the US President for whom domestic economic growth remains the foremost goal), solutions are not that easy to come by. Investors want ESG? Companies will give it to them, albeit in words probably more often that in deeds.

British Prime Minister Boris Johnson boycotted the World Economic Forum, preferring to stay in his homeland ahead of the 31 January deadline. Interestingly, when asked what will be lost through Brexit, members of the European parliament pointed first to humour – a very useful trait to facilitate cohesion – as well as Britain’s global diplomatic network. There is also reason for concern on the military front: now contributing a meagre 20% of NATO’s budget, the EU will no doubt come under renewed fire for its lack of defence spending. Last but not least, the British representatives were ardent proponents of the free market, prompting fears that regulation and government intervention will only intensify within the EU during the coming years – further driving down the productivity growth necessary to keep the current social benefit system afloat. All told, much has been lost through Brexit and, beyond having to reach a trade agreement before the end of 2020, both parties now face the difficult task of reinventing themselves.

Davos did host President Trump though. He arrived in the Swiss mountain resort just as the US Senate was starting on his impeachment trial, which demonstrates how little he has to fear on that matter, and then proceeded to deliver what can almost be termed a “campaign speech”. Speaking of which, the battle for Democratic presidential nomination has now truly begun, with the (somewhat disorganised) Iowa caucus to be followed by primaries across the US during the next few months. The presidential election is still a long way off, but Trump will not be easy to beat – particularly if the Democratic nominee sits too far on the left side of the party. One can also bet that the incumbent president will take whatever measures are necessary to support the US economy and stock market ahead of the early November vote.

As such, and considering also the lack of yield in the fixed income space, we continue to see few investment alternatives to equities.

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