2020-03-16_Bloomberg_Businessweek_Asia_Edition

(Jacob Rumans) #1
Bu ar

What I’m
telling clients
Brendan MacMillan,
CIO, QP Global Family
Offices in New York,
which manages family
offices and their wealth
We believe the market
hasn’t discounted the
full potential for an
event as significant
and symbolic as the
temporary closure
of the U.S. school
system, or at least their
statewide closures in
California or New York.
We don’t see a high
probability that the
effects of Covid-19 will
lead to a credit crisis
yet, but just in case
we get that wrong,
we will look to hedge
our equity positions
by shorting stuff like
HYG, the high-yield
bond exchange-traded
fund. �As told to
Joel Weber

4


○ When Covid-19 strikes, the worst of the
damage is done by the body’s effort to fight off
the disease. The immune system can overreact
in what doctors call a cytokine storm. Immune
cells attack not just the viral invader but healthy
tissue as well. Victims gasp for breath as their
lungs fill with fluid. The novel coronavirus,
which scientists have christened SARS-CoV-2,
tricks us into fighting it so hard that, in the most
extreme cases, we kill ourselves.
As with the body’s immune system, so with
the defenses of the global economy. There’s a vir-
tual cytokine storm going on: The all-out effort to
battle the disease is doing more harm to global
growth than the disease itself. Quarantines, travel
restrictions, business closings, and citizens’ vol-
untary self-protection measures have frozen busi-
ness while wreaking havoc on people’s routines.
This will be the business story of 2020: Can the
world modulate its immune response so as to fight
Covid-19 in a way that saves lives without damaging
everything else we care about? Or is this a lost year?
There’s reason to worry that simultaneously
defeating the virus and sustaining growth will be
hard, if not impossible. New cases in China have
declined sharply, which is wonderful news. But to
make that happen the country’s leaders imposed
one of the most extensive quarantines in his-
tory, corralling close to 60 million people inside
Hubei province, the epicenter of the outbreak.
Governments in surrounding provinces also took
steps to protect their populations, enacting travel
bans and forcing factories to shut down. The eco-
nomic toll has been high: Growth in the first quar-
ter will be just 1.2%, according to projections by
Bloomberg Economics—the slowest year-over-year
rate since China started keeping records.
Despite Beijing’s best efforts, there have been
large outbreaks of Covid-19 across China as well as
in South Korea, Iran, Italy, and elsewhere. And now
that authorities outside of Hubei have begun easing

restrictions to limit the economic pain, there’s a
risk that the number of new cases in the country
will begin to rise again as people go back to work-
ing, studying, and shopping. If the number of new
cases in China does keep falling, it will show that
an authoritarian state with a pliant population and
high-tech surveillance capabilities can rein in Covid-


  1. But few—if any—other nations could employ
    China’s strategy with the same strictness.
    Forecasters have now turned their attention to
    the U.S., the only nation with a bigger economy than
    China’s. The question is the same: How much will
    Covid-19 take off U.S. growth—and how much of the
    harm will come from efforts to fight the disease vs.
    the disease itself? There were 1,107 reported cases
    and 36 deaths in the U.S. through 4 p.m. Eastern
    time on March 11, according to data collected by
    Bloomberg. That number is expected to leap.


● How vulnerable


is the U.S.?


Economists who were initially blasé about the
potential hit to the U.S. have become increasingly
concerned. Goldman Sachs Group Inc. revised its
U.S. outlook downward in late February to reflect
a drop in U.S. goods exports to China, fewer tour-
ist arrivals from China, and modest supply chain
disruptions for U.S. retailers. But that turned out to
be not pessimistic enough. “Over the last week the
situation has proven worse than we expected,” the
Goldman team wrote on March 1, citing increased
economic weakness in China and further spread
of the virus outside the country as key factors in
the decision to downgrade full-year 2020 growth
to 1.3%—a full percentage point below the previ-
ous forecast. A week later, Goldman lowered its
forecast once more, to 1.2%, despite the Federal
Reserve’s half-percent rate cut.

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