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What’s needed to restore investor confidence – and potential for inflation

30 March 2020

Global markets need greater clarity on the scale and trajectory of the Coronavirus outbreak, an understanding of the policy response and an end to the global oil price war in order to restore investor confidence, according to Andreas Billmeier, sovereign research analyst at Legg Mason affiliate Western Asset.

His assertion follows weeks of volatility across global indices as investor panic around the Coronavirus pandemic deepened.

Billmeier said: “We are currently at 2008/09 levels in terms of leading soft indicators for economic activity in Europe, except that we arrived here much quicker and there is no guarantee that the data won’t get worse.”

For investors to ascertain what the bottom of the market looks like, there needs to be greater knowledge around how far the virus will spread and how individual governments will react to contain the spread and minimise economic impact, he said.

In addition, an end to the oil price war and the renewal of talks is needed to help restore investor confidence, after the cost of crude slumped to levels not seen since the aftermath of the 2003 Iraq invasion.

Billmeier also warned that while economic data had already started to suffer the fallout of the crisis, a drop in unemployment remained a looming risk, as millions of businesses are closed to halt the spread of coronavirus and manufacturing capacities are forced to stand idle. In the US alone, the weekly jobless claims data showed well over 3 million new claims, higher than at any time recorded since the financial crisis.

During the financial crisis of 2008, Germany instigated a policy whereby employees took a pay cut by working less hours and the government took on a portion of companies’ wage bills, with the overall effect being to substantially reduce companies’ staff overheads. It resulted in Germany’s unemployment rate rising by just 1% rather than the 5% anticipated had the scheme not been introduced. Both Germany and the UK are now instigating similar policies in an effort to tackle the rise of high unemployment

Billmeier said: “The schemes need to be implemented effectively of course, but both countries are the furthest down the road on this key policy. Crucially, they have therefore provided a blueprint for the rest of the world which, if implemented, can keep unemployment numbers down. Now the rest of the world, and especially countries with inflexible labour markets, should look at similar policies to protect jobs.”

Inflation likely to remain low

Separately, the Bank of England has warned that inflation will fall below 1% in the Spring from a current level of 1.7% as a result of a drop in oil prices.

However, Sandra Holdsworth, head of rates, Kames Capital, said other key economic data including GDP, unemployment, average earnings and productivity will suffer far more dramatic revisions as a result of the Coronavirus shutdown.

Gilles Moec, group chief economist, AXA Investment Managers, agreed that the crisis has left many question marks, including the impact on consumer prices.

He said: “The current supply-side shock takes the form of an extreme decline in capacity utilisation, while not much of the existing capacity is destroyed. This suggests inflation should remain subdued when demand starts normalising.”

Some items may see their prices significantly increased if they are in high demand, while businesses in key sectors may have to hike their wages to reward their staff risk-taking.

He added: “The fiscal measures everywhere aim at replacing lost income or ensuring there is no lasting decline in production capacity. That cannot be inflationary. The monetary stimulus works by making the fiscal support financially sustainable. The hike in public debt will be permanent and sustainability will still need to be protected. This calls for prolonged accommodative monetary policy. Besides, demand may well be “shell-shocked” for a long while after the lockdowns are over.”

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