Why the coronavirus threat, new trade barriers and massive global debt will not dampen stock markets

Central banks seem committed to loose monetary policy, which means the wall of money they have created since the 2008 financial crisis needs to find a home
Negative yields in mainstream bond markets, meanwhile, will push investors towards equities

David Brown

Published: 1:00am, 28 Jan 2020

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Now that the party in the Swiss Alps is over, it’s time for world leaders to get down to the job of jump-starting a post-Davos global recovery. How they do that in this new world order of growing policy inertia, trade frictions and economic isolationism is open to speculation, but not impossible.

Multilateral accord may seem thin on the ground, just at the moment when there’s a dire need for a bigger collective effort to finish the job which began in the dark days of the 2008 financial crash. But getting the global economy back on track for durable, sustainable recovery is just as imperative now as it was over a decade ago. It’s definitely time for more meaningful action.

After all, this is supposed to be the year that global recovery gets back into gear. It may be early days but global confidence is floundering, global stock market sentiment appears to be at the top end of the equity cycle and investors are beginning to find all sorts of excuses to be more cautious.

The coronavirus contagion, the worry about new trade barriers emerging, dangerously high global debt levels and despondency about a new economic downturn are all playing their part. It is plain to see in the latest global purchasing managers’ surveys, in which there’s a general indifference about the outlook. Uncertainty is taking its toll.

On the positive side, none of these problems should be insurmountable and patience should be rewarded. Sophisticated financial economies are used to challenging circumstances and global policymakers, not least the major central banks, should have it covered.

The US Federal Reserve is playing a waiting game, sitting on the fence, and is prepared to jump down on the side of lower rates if need be.

The euro zone remains committed in the long term to super easy monetary policy to secure European recovery. And China still has plenty of extra room for policy easing if needed. Monetary authorities around the world generally seem committed to making recovery work this year.

World confidence might have caught a chill but better health will prevail. The damaging effects of the coronavirus crisis, like the severe acute respiratory syndrome outbreak in 2003, will eventually fade. More importantly for the future of the global economy, global trade frictions should eventually be quelled this year.

US President Donald Trump has an election to win this November and he will be hoping to boost his chances with a critical breakthrough in the US-China trade war.

The spectre of a deepening trade war with Europe should also recede as he seeks to avoid any further damaging escalation. In fact, a much more welcome Trump bonhomie should emerge.

A more conciliatory Trump and easing trade tensions could do wonders for global stability. Political populism is on the wane in Europe and Brexit worries will be contained. There’s a growing shift away from global fiscal attrition with governments more amenable to deficit-spending measures to boost demand.

With the Fed smiling on them, equity markets should have a good year

It’s an opportunity for multinational organisations like the International Monetary Fund, the World Bank and G20 nations to work together and harmonise efforts to strengthen global reflation.

Christine Lagarde, president of the European Central Bank, and US Treasury Secretary Steven Mnuchin speak at the 50th annual meeting of the World Economic Forum in Davos, Switzerland, on Friday. With governments more amenable to deficit spending measures, multinational organisations have an opportunity to work together to strengthen global reflation. Photo: EPA-EFE

Global equity markets will continue to thrive, with precious few alternatives for investors to park their funds more gainfully. Negative yields in many mainstream bond markets means investing in government debt comes at a price.

Meanwhile, investors look overloaded on their cash buffers. The wall of money created by global central banks since the 2008 crash still needs to find a home.

From an opportunity cost perspective, it means stock market momentum should continue its upside run. There will be corrections, which will simply offer chances to reinvest at better levels. Market surveys still show investors relatively underweight on their equity holdings.

As trade protectionism unwinds this year, world economic confidence recovers and global conditions begin to improve, world economic growth could be heading back towards the 4 per cent mark by the end of the year. Far from growing despondency, investors have it all to play for in 2020.

David Brown is chief executive of New View Economics

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