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 1. Saving & Investing
 2. The COVID-19 Impact: Answers to 10 Urgent Questions From Investors

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THE COVID-19 IMPACT: ANSWERS TO 10 URGENT QUESTIONS FROM INVESTORS

SAVING & INVESTING
März 26, 2020|5 min read
   
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A Q&A WITH PGIM FIXED INCOME’S CHIEF ECONOMIST ON THE STATE OF THE MARKETS AND
ECONOMY.

The growing outbreak of COVID-19 caused a widespread sell-off across financial
markets as global supply chains were disrupted, travel and tourism ground to a
halt, and everyday consumer activity has slowed with reports of community
spread. With the markets in turmoil, Nathan Sheets, former U.S. undersecretary
of the Treasury for International Affairs and current chief economist at PGIM
Fixed Income, answered 10 questions about what the coronavirus could mean for
the global economy.

 





 


WHY DID THE MARKET FALL SO FAR SO FAST, AND ARE WE CLOSE TO A RECOVERY?

You have the virus, you have people’s reactions to the virus, and the collapse
in oil prices—all of that is working its way through the system. It’s likely to
be a pretty severe next few months for the global economy, and that’s with
monetary stimulus or without it. Investors hate the unknown, and the markets are
likely to remain volatile until we have a sense that the virus is contained. In
the United States we’re not there yet and may have a long way to go. Given that,
there is a fair amount of risk for further downside in asset prices over the
next couple of months.

 


WILL THE COVID-19 IMPACT LEAD TO A GLOBAL RECESSION?

The key question is, how long will we need to take extraordinary precautions in
response to the virus? As the pendulum swings toward greater caution on public
health, that comes with an economic cost. If people are staying home, they’re
less likely to spend, and demand in the economy is going to fall. In that
environment, firms will be unlikely to hire; they may lay off workers. If the
effects of the virus are felt for an extended period of time, inevitably that
will lead to recessionary conditions. Even if we avoid recession by a strict
definition, it’s going to feel pretty rough through the months ahead.

 


HOW WORRIED SHOULD WE BE ABOUT CORPORATE OR CONSUMER DEBT CAUSING WIDE IMPACT ON
THE MARKET?

In the aggregate, U.S. consumers aren’t particularly indebted. But those in the
bottom half in terms of their income do have a fair amount of debt. As long as
the labor market remains strong, this group will be able to continue to service
their debt. However, if this episode lasts long enough and we see the
unemployment rate rise meaningfully, that could have adverse implications for
the ability of these households to repay their debt and for the financial
system. On the corporate side, a lot of heavily indebted BBB-rated firms were
making good progress toward deleveraging, and we saw some of them even upgraded.
But if the economy were to slow sharply in a sustained way, they might be
vulnerable. Not necessarily at risk of defaulting, but at risk of being
downgraded.

 


SHOULD INVESTORS BE CONCERNED ABOUT THEIR 401(K)S?

Given the nature of this shock and knowing what’s driving it, there’s good
reason to think that when the crisis passes, the fundamentals of the economy
will be solid. The best advice for individual investors is to not look at their
statements. What’s happening now is a severe reaction and it’s reflecting
uncertainty and liquidity problems. But when it passes, the economy is likely to
bounce back. There’s pretty good value being created in the markets even as
we’re seeing these declines.

 


ARE THERE SECTORS OF THE MARKET THAT WILL SEE LESS VOLATILITY OR BOUNCE BACK
SOONER?

The decline is so broad-based that pretty much everything has fallen. Globally
there will not be many safe harbors. One area where there is dramatic
differentiation is across countries. So far, countries in the southern
hemisphere have been somewhat less impacted by COVID-19. They have warmer
climates, younger populations on average and, in many cases, lower population
density than Asia. China’s economy has felt the biggest blow so far, and it is
likely to contract sharply in the first quarter.

 


WHAT LONG-TERM IMPLICATIONS MIGHT THIS CRISIS HAVE FOR DIFFERENT INDUSTRIES?

The cruise industry will survive, but cruising may have to be different than it
has been in the past—the whole model may need to be reimagined. The question is,
will the change be led by the dominant firms today or other firms? The airline
industry is down 25%-50%. They have good business models and they will be hit
for a while, but will they be hit so hard they need public assistance? That
could impact them long term. One of the transformational things that might come
out of this is that we may become more dependent on technology that allows us to
work remotely, which we’re seeing as social distancing takes hold. That may be
good for the tech companies. In the health industry, some pharma company will
figure out a vaccine for this and that company will be a winner. But more
broadly, for companies that produce equipment people use in medical offices,
perhaps we will see growing demand for a more adept and larger pipeline capacity
to provide health care, and some of those companies may benefit.

 


WHAT IMPACT WILL THIS HAVE ON CONTRACT WORKERS AND THOSE IN THE GIG ECONOMY?

With the gig economy, we match up online with a stranger, a service is
exchanged, we do it again and are matched up with someone different. Will we see
a procession of Uber drivers in our lives as posing an undue risk? We may want
to be familiar with people we’re interacting with, which could make it more
difficult for the gig economy.

 


WHAT EFFECT WILL THE MONETARY POLICY BY THE FED AND FISCAL STIMULUS FROM THE
GOVERNMENT HAVE?

The monetary policy stimulus helps support the economy by ensuring there’s not
permanent damage done to the economy’s productive capacity. The Fed has now cut
the federal funds rate to zero and moved aggressively with a significant
quantitative easing (QE) and liquidity package. I’m quite confident that they
will do more, if necessary. The Fed is taking out its playbook from 2008 and
putting in place many of those policies. Fiscal stimulus will be helpful in
supporting demand in the economy, making sure that some of the firms being
adversely affected can continue to do business until this period passes.

 


WHAT WILL IT TAKE TO BRING CALM TO THE MARKETS?

The markets are looking for clear leadership. They need to get a sense that we
have a plan of attack on how we’re going to respond to the virus, and that the
plan is coordinated across federal, state and local agencies. Ultimately, how
bad the downturn gets will depend on the evolution of the virus and what we do
to protect our health. Monetary and fiscal policy can dull the pain and help
ensure the economy is in good shape on the other side of this difficult time,
but it can’t solve it. Every dollar spent putting in place the healthcare tools
to respond to this will have an enormous economic payout.

 


WHAT SHOULD INVESTORS CONSIDER RIGHT NOW?

First, don’t panic. Keep your eyes on the long term and recognize that once we
arrive at a point where the virus is largely under control there’s likely to be
meaningful value in the markets. There’s no way to sugarcoat it—this will be a
painful period for investors of all kinds, but the best strategy is to hunker
down. I expect that the bounce-back here will be sharper than what we saw after
the global financial crisis. Back then, we not only had to address the crisis,
but there were still a lot of imbalances, bad loans and other problems in the
system that needed to be worked off. Here the cause is a physical contagion, not
contagion in the markets.

 


NOTICE: IMPORTANT INFORMATION

Source(s) of data (unless otherwise noted): PGIM Fixed Income, as of 03/17/2020.

PGIM Fixed Income operates primarily through PGIM, Inc., a registered investment
adviser under the U.S. Investment Advisers Act of 1940, as amended, and a
Prudential Financial, Inc. (“PFI”) company. PGIM Fixed Income is headquartered
in Newark, New Jersey and also includes the following businesses globally: (i)
the public fixed income unit within PGIM Limited, located in London; (ii) PGIM
Netherlands B.V. located in Amsterdam; (iii) PGIM Japan Co., Ltd. (“PGIM
Japan”), located in Tokyo; and (iv) the public fixed income unit within PGIM
(Singapore) Pte. Ltd., located in Singapore (“PGIM Singapore”). PFI of the
United States is not affiliated in any manner with Prudential plc, incorporated
in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G
plc, incorporated in the United Kingdom. Prudential, PGIM, their respective
logos, and the Rock symbol are service marks of PFI and its related entities,
registered in many jurisdictions worldwide.

These materials are for informational or educational purposes only. The
information is not intended as investment advice and is not a recommendation
about managing or investing assets. In providing these materials, PGIM is not
acting as your fiduciary. These materials represent the views, opinions and
recommendations of the author(s) regarding the economic conditions, asset
classes, securities, issuers or financial instruments referenced herein.
Distribution of this information to any person other than the person to whom it
was originally delivered and to such person’s advisers is unauthorized, and any
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that PGIM Fixed Income believes to be reliable as of the date presented;
however, PGIM Fixed Income cannot guarantee the accuracy of such information,
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