Joe Gill: Covid-19 shows why nothing spooks markets like fear and uncertainty
The Irish economy will undergo a major shock in coming weeks as the consequences on Covid-19 unfold.
Being a small but open economy Ireland is plugged into developments across the globe so it should be no surprise that an external jolt of this type will be keenly felt.
Stockmarkets are lead indicators for the economy and the brutal sell-off in equities over the past few weeks is all you need to know. The velocity of the stockmarket decline will be reflected in the speed at which economic activity contracts but that too may be an insight into how we recover from this.
Rolling headlines about shutdowns and travel restrictions will be the way news relating to Covid-19 unfolds in days and weeks to come. This will spook a lot of investors and economists and there is only one way in which this sharp reaction can be brought to a shuddering halt.
Imagine the World Health Organisation (WHO) announced it was approving a cure for Covid-19. Even though that cure would not be available around the world for months it would trigger a violent upward move in financial markets. That is because nothing undermines equity markets more than uncertainty and fear. A cure would help outline a pathway to make sick people well and provide a vaccine against this virus. Only then can the economy normalise.
Over the past weekend, America became fully invested in Covid-19. Any perusal of past global crises shows that when the US is mobilised it can bring enormous resources to bear. Moreover, it is clear that politicians of all hues in the US are understanding the real threats this virus pose for their economy. Hence, expect a flurry of activity and spending as America brings its best minds together to tackle this challenge.
A number of US pharmaceutical companies are working intensely to address Covid-19 but one – Gilead – is much more advanced than all the rest. Its drug Remdesivir has already proven its credentials in Ebola, SARs and MERs, all of whom have common originating factors with Covid-19.
Its drug is in widespread testing across China and the US over the past number of weeks with up to 1,000 patients. Guidance suggests these trials will take until late April to conclude but we can only imagine the speed at which US authorities will support an acceleration of that process. Other drug companies are working on solutions around the world but Remdesivir could be the silver bullet.
A severe shock to the global economy will lead to major disruption and loss of earnings but if a drug solution can be found this impact will be contained possibly to two quarters or six months. That will hammer profits for 2020 but share prices are not measures of one year’s profits.
Instead, they stretch over a decade or more. Past crises, including 9/11 and the global financial crisis felt as bad as Covid-19 while they were happening. Yet, these were the times when long-term investors should stay committed to investing in high-quality companies.
Businesses with competitive cost bases and strong balance sheets will survive this major challenge and come out the other side of it stronger as their weaker competitors struggle and fail amid falling demand.
While debating this serious virus it is worth noting over 81,000 people have died from the flu since January 1. In the same period over 225,000 people have died in car accidents. Just over 3,000 have died from Covid-19.
It is right authorities take action to control this outbreak but equally it is worth noting the global economy is managing other major health issues that get limited media headlines.
A sharp negative economic impact from Covid-19 will not undermine the world as we know it but expect choppy waters ahead.
