Coronavirus, oil crash - It’s not the financial crisis
“We do not think this is 2008, however. The virus’s impact will likely be large and sharp, but we believe investors should be level-headed, take a long-term perspective and stay invested. The economy is on a more solid footing and the financial system more robust compared with 2008,” it said.
BlackRock said it did not see this as an expansion-ending event - provided that a pre-emptive and co-ordinated policy response was delivered.
It said it had seen encouraging signs that this policy response was starting to come together. However, it would need to be a joint and decisive effort between fiscal and monetary policy, with key vulnerabilities addressed such as cash challenges faced by companies, particularly small and medium-sized enterprises, and households.
It said market moves had been compounded by oil prices plunging more than 20percent - on track for the biggest daily drop since the early 1990s - as an Opec pact to stabilise prices unravelled.
“This should ultimately benefit global growth, but it also risks at least temporary financial and economic dislocations in energy-heavy sectors, such as emerging-market commodity exporters and parts of US high yield,” it said.
BlackRock said the depth and duration of the coronavirus’s economic impact were uncertain, but it believed the shock should be temporary, as the outbreak would eventually dissipate and economic activity would normalise - assuming the needed policy response was delivered.
Sanisha Packirisamy, an economist at Momentum Investments, and Herman van Papendorp, the head of investment research and asset allocation at Momentum Investments, said the Covid-19 outbreak will have a short-term negative cyclical effect on global growth and company profits.
“As such, global equity markets will experience downside pressure, while valuations adjust to the interim reality of lower profits amid spiking volatility,” Packirisamy and Van Papendorp said.
While the virus continues to spread, uncertainty will rise and markets are likely to overreact, as they always do. They said the overreaction could even be amplified, due to social media spreading half-truths and even outright fake news about Covid-19.
Once the virus effect has played out and global supply chains become unblocked again, there will be a significant rebound in economic growth and profits, discounted by rising share prices at the time.
“While short-term investment returns will be negatively affected by Covid-19, history has shown that long-term returns are largely unaffected by these kind of events, which, in retrospect, are barely discernible on longer-term graphs of asset class returns and hence turn out to be far less significant than they are deemed at the time,” said Packirisamy and Van Papendorp.
They said opportunities will likely present themselves to enhance long-term returns by taking advantage of asset price dislocations during market overreactions to the virus on the back of sentiment-driven market behaviour.