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#Market Strategy — 07.04.2020

COVID-19 vs Past Crises, and How has 5G contributed so far?

Prashant Bhayani, Grace Tam & Dannel Low

HIGHLIGHTS

  • March saw a deep selloff in the financial markets. Past crises have shown that developments are usually split into 3 segments, market impact, policy response and corporate earnings discount. The nature of the current crisis is event driven, hence we expect volatility to remain, until convincing containment of the virus is witnessed globally.
  • We believe there will be strong/renewed push for 5G infrastructure and application post COVID-19 crisis. This COVID-19 episode highlighted a critical need for more efficient and sophisticated technology to boost connectivity, global healthcare infrastructure and industry 4.0, so as to ensure seamless transition should there be a repeat of such event in the future.

How does this crisis compare to previous ones?

The current crisis is essentially an event driven exogenous shock. Reactions during crisis period can usually be split into 3 segments:

(1) Market and economic impact,

(2) Policy response, and

(3) Deep discount in corporate earnings.

Here, we compare the difference in monetary policy measures implemented thus far versus previous crises. The following are the responses so far in the current COVID-19 crisis:

(1) Market & Economic Impact – investors and companies rush for cash

We have seen global equities plunge 34% since the broader COVID-19 outbreak in February, compare to an average decline of 32% in bear markets with recessions since 1930s. Similar to 2008, gold saw significant decline initially as many investors needed cash to cover margin calls in other assets.

Emerging markets were hit particularly hard due to the USD funding stress, where we saw the Dollar Index surging more than 8.35% intra-month.

In the credit space, investment grade and high yield credit spreads widened substantially, while US Treasury initially underwent a liquidity stress given massive deleveraged unwinding of systematic hedge fund strategies and massive outflows of bond funds.

There were only 5% of 140 recessions since 1980 that lasted no more than two quarters. Our base case scenario is there will be a significant fall in GDP in most regions in 2Q, followed by a progressive recovery in the second half of the year.

We have revised down sharply the average GDP growth forecasts for 2020 with the US at -0.7%, Eurozone at -4.3% and China at +2.6%. 

(2) Policy Response – avoid credit crunch, provide relief and stimulate economies

Monetary policy: Central banks globally have taken the “whatever it takes” approach to provide liquidity and ensure that markets continue to function. The Fed’s unlimited QE as well as the announcement to purchase Investment grade corporate bonds (first time in history) show their intent to provide as much support as the economy needs.

There has also been unprecedented moves beyond actions taken in 2008, such as the FIMA Repo Facility announced on 31st March which offers liquidity to foreign central banks in order to alleviate pressure on the dollar funding stress.

10-year-bid-ask

Source: Datastream, BNP Paribas as of 3 April 2020

Fiscal policy: Governments globally have implemented sizeable stimulus packages. This includes China’s stimulus response of approximately 1.2% of GDP as well as a the historical USD 2 trillion relief package (10% of GDP) by the US Federal Government.

Elsewhere in Asia, countries are increasing stimulus size across the board. Singapore announced a second relief package, bringing its total package to around 11% of GDP. Malaysia likewise announced a economic stimulus package worth RM250 billion (17% of GDP) to combat the economic disruptions from lockdowns globally.

(3) Deep discount in corporate earnings – Market bottoms before EPS trough

On average in the last 3 US recessions (1990, 2001 and 2008), earnings were revised downwards by ~20%. The bear market tends to bottom 2-3 months before EPS trough.

2020 US earnings growth has been revised down from +9% at the start of the year to +3.6% currently. Further substantial discount in earnings growth by ~15% should be expected. Clearly the longer lockdowns around the world last, the more we should see earnings revised downward.

Financial-crisis-2008

Source: Datastream, BNP Paribas as of 3 April 2020

Strong push for 5G infrastructure & application post COVID-19

As mentioned in the CIO Insights last month, technology is an area where we see massive benefits and potentially more investment capital post crisis. As more and more countries enter lockdowns, the usage of online platforms has increased.

There is also renewed interest in further development of humanless delivery, as well as industrial automation and smart logistics especially since the COVID-19 outbreak disrupted supply chains and manufacturing around the world massively.

Particularly interesting during this round of crisis is the application of 5G and artificial intelligence (AI) to combat the virus outbreak. This was evident in China, where advanced digital capabilities like 5G networks and AI have been used in healthcare services, location-tracking processes, transportation systems and research facilities.

For example, patrol robots were actively deployed to aid containment. These robots integrate IoT, AI, cloud computing, and big data technologies to act as the first-line of defense, significantly reducing the risk of infection.

Remote consultation and medical analysis between hospitals were also made possible through the 5G network, allowing focus on patients in critical conditions and helped improve the diagnosis and treatment process.

Post crisis, we believe there will be an increased push for 5G adoption. As countries globally move towards social distancing and lockdowns, work-from-home has become more of necessity rather than a choice.

We saw an increase in demand on bandwidth, both for work-related applications as well as entertainment. Seamless transition to ensure employees are capable of working from home is now a priority. There will be huge emphasis on things like 5G video conferencing, remote access, cloud-based application, as well as VR and AR to create alternative meeting places.

In fact, Chinese President Xi Jinping has already made a new push for 5G infrastructure in the country. 5G networks and data centres are now top priority on China’s plans to spend on ‘new infrastructure’. The construction of the network is also expected to drive investment in applications in other industries, which is projected to exceed 3.5 trillion yuan in the next five years.

Conclusion

Due to the unpredictable nature of the current health crisis, we expect volatility to be high in markets, until a convincing containment of the virus is witnessed globally. In times like this, accumulation of risk assets such as 5G megatrend theme for medium to long term horizon looks attractive.