Investment - Articles - COVID19 and what exactly is going viral

According to global asset manager Columbia Threadneedle Investments, investors should not flee into cash before interest rates slump as a result of the coronavirus. "I wouldn't recommend going into cash," says Colin Moore, Global Chief Investment Officer at Columbia Threadneedle. "Interest rates are very low, and if there is a monetary policy response to the current situation, they are going to fall even further."

 Instead, investors should ask themselves whether they consider the situation to be a structural phenomenon or a temporary one. "I strongly believe it's not structural," says Moore. “So we should be getting to a point where markets have been overreacting, because of their extrapolation of a temporary phenomenon into a permanent one."

 He continues: “The situation is quite serious, of course, and we should not forget the considerable human cost – not just those affected by the virus itself or their families, but the angst that is being shown by the broader population. And that's where it begins to affect markets because that affects economics.”

 According to Columbia Threadneedle, there are short-term risks mainly relating to the liquidity of individuals and of some companies. If activity comes to a standstill – ie, people no longer go to work or companies no longer sell any goods and services – cash flow dries up. At the same time, expenses and liabilities remain. “Investors who don't have sufficient liquidity tend to sell what they can - not what they should,” says Moore. “Then what you get is mis-pricing of risks and opportunities in the marketplace.”

 Columbia Threadneedle therefore expects monetary policy to play a minor role in addressing the consequences of coronavirus. Moore says: “The focus should be on providing liquidity rather than the cost of money. Obviously the two are related, but liquidity as an instrument offers more policy options than leading with rates. Lower interest rates alone may stabilise market sentiment but will have limited impact on consumer and business confidence if it is the only response.”

 According to Moore, the market goes through phases of denial, acceptance and then exaggeration. It seems to him that the market is moving towards the latter. “Trading volumes have increased significantly, which means some securities are currently undervalued."

 The risk of a recession has increased as a result of the short-term economic impacts of the coronavirus fears. "But the duration and depth of a recession, if it occurs, is likely to be quite short, with the exception of the most affected countries such as China." According to Moore the duration of the recovery will vary from industry to industry. "It will probably take a lot longer for tourism to pick up than visits to the local grocery store " he says.

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