- According to the World Health Organization, as of 22 March, the COVID-19 has spread to 186 countries and there are currently 294,110 confirmed cases and 12,944 deaths from the outbreak. We have seen how draconian and swift government actions in Asia can contain the virus at very significant economic cost, with strong health care outcomes. US and European governments have reacted far less stringently due to structural and political norms that make such centralized action rare. So, Western countries are beginning to respond to the pandemic in that way for the first time in modern history.
Citi’s view on the economy
- As Citi analysts note, the circumstances now are very different than the 2008 financial crisis. 2008 was an intrinsic shock, a crisis due to undercapitalized banks underwriting and syndicating toxic mortgages.
- These 2020 exogenous shocks are unique and require aggressive policy responses. The Fed’s aggressive actions of cutting rates to zero and launching $700 billion quantitative easing program on 15 March were necessary to support the financial system and lay the groundwork for an eventual economic recovery.
- However as they may not be sufficient, what appears necessary is a huge fiscal response by the governments around the world. Furthermore, the required fiscal response spending needs to be highly targeted to ensure that individuals and business maintain their fiscal health amidst a “virus attack” that is likely to last for a few months.
Citi’s view on the markets
- In the coming few weeks, the roller coaster in broad equity and credit markets is expected to continue, with equities potentially biased to further retrenchment. This is because Citi analysts believe the public’s response to facing the virus is in its earlier stages in the US and Europe, lagging economies like China. Citi analysts expect that uncertainty over the peak of virus to remain high for 4-8 weeks.
- Nevertheless, Citi analysts remain convicted to the view that 6-12 month equity returns after 20% corrections have historically been strong. There are also areas within the markets, including high quality US and European equities (especially dividend growers), leading companies in emerging markets and industries poised for sustained growth over the next 5-10 years that may be further mispriced and could present opportunities.