Financial Times Europe - 21.03.2020 - 22.03.2020

18 ★ 21 March/22 March 2020

pay a private clinic for a mail order

testing kit.

Tests for the wealthy will not solve

the crisis. Scale is required. Otherwise

any response is like trying to fight an

outbreak “blindfolded”, as the World

Health Organization says. South Korea

has managed to get a grip on its

outbreak with stringent testing. An

infection controlexperiment n thei

small Italian town of Vò, near Venice,

stopped the spread by rigorous testing

and retesting.

Western governments are planning

to ramp up tests to tens of thousands a

day. Big companies like Roche and

Thermo Fisher are stepping up.

Innovativebiotechs re playing a rolea

too. The UK government has ordered

thousands of tests from Anglo-French

Novacyt. Its shares are up eight-fold

since the start of the year. Shares in

Italy’s DiaSorin are up 11 per cent since

news this month that it had cut testing

time to just one hour. Its test got the

green light from US regulators

yesterday.

The hunt is on for accurate ways of

measuring antibodies the body

develops to fight the virus. Such tests,

already deployed in Asia, would shine a

light on the spread of the disease,

detecting even mild or asymptomatic

cases weeks or months later. It would

allow some people to go safely back to

work, easing the lifting of lockdowns.

Testing has been the weak link in rich

countries’ fight against the disease. It

should soon become the strongest tool.

blanket EM debt default risk may be

misplaced. During the “taper tantrum”

of 2013, EM bond prices all fell amid

fears that a stronger dollar would make

dollar debt harder to repay. Many

countries are now better placed to face

such shocks. Current account deficits

have shrunk and foreign reserves are

up. Banking systems are better

capitalised and regulated.

he immediate threat to major EMT

economies is not default but economic

damage caused by the pandemic.

JPMorgan expects emerging markets,

excluding China, to fall into a recession

in the first half of this year. EM

corporate earnings will suffer. Equities

accounted for the bulk of the$78bn

that non-resident investors pulled out

of EM assets in the past two months.

But EM sovereign bond returns have

consistently outperformed Treasuries

over the past five years. With rock-

bottom interest rates everywhere,

expect that trend to continue.

Emerging market bonds held steady
when the coronavirus outbreak was
first reported in Asia. Now the
pandemic is global, things are getting
ugly. But EM debt investors have been
here before.
In the week to March 18, investors
pulled $18bn out of EM fixed income
funds, according to global fund tracker
EPFR, the most since data began. It is
more than twice the 7bn in outflows$
recorded the previous week.
The DXY index, which tracks the
buck against global peers, is at a three-
year high. That is bad news for
indebted emerging market economies
reliant on steady inflows from
investors overseas.
Fears are growing for the stability of
$72.5tn worth of government,
corporate, household and financial
sector debt. The combined debts of 30
large emerging economies rose to a
record 221 per cent of gross domestic
product during the third quarter of last
year, according to the Institute of
International Finance. Further bond
price falls look likely. Yet a focus on

Michael Mackenzie

The Long View

Saloon bar philosophers have long
insisted that “the world owes no one a
living”. It must be galling hen aw
Conservative chancellor asserts the
opposite. Rishi Sunak plans to pay 80
per cent of the salary ofemployees left
idle by the epidemic. This is fair and
pragmatic. Millions would otherwise
endure needless hardship. The blow to
confidence would lengthen the UK’s
impending recession.
The scheme outlined by Mr Sunak
should fill the gap left by the £330bn
loans and guaranteesschemefor
business he announced on Wednesday.
The wage cover is capped at £2,
per month. Combining that with
proportionate cover for lower-paid
staff introduces a little complexity. And
as Panmure’s Simon French puts it:
“Anything that increases complexity
reduces effectiveness.” Mr Sunak left
the impression that payments would
be made via the machinery of Pay-As-
You-Earn, which should reduce
administrative friction.
The payouts will be higher than most
expected. Some quick sums hint at the
scale of costs. If around 6m workers in
sectors worst exposedget average wage
support of £2,000 per month for three
months, it would leave the Exchequer
with a£36bn bill. That is a potentially
big slug of quantitative easing.
Universal cancellation of business
rates was among concessions business
lobbied for, but Mr Sunak did not
provide. This would be worth around
£7bn for a single quarter. The
chancellor’s calculation is evidently
that the loans and grants scheme will
act as the main support. Over half of
this will consist of commercial paper
purchases by the Bank of England.
Prime minister Boris Johnson, still
groping for Churchillian gravitas, has
ordered pubs and restaurants to close.
Tim Martin of Wetherspoons, the UK’s
leading saloon bar philosopher, will
lack the natural environment in which
to continue prognosticating. At last, an
upside to coronavirus. It is just a pity
no one else will be able to get a drink.

Wage support/Sunak:

pennies from heaven

Emerging markets:

outbreak outflows

Lex on the web

For notes on today’s breaking

stories go towww.ft.com/lex

One silver lining of Brexit (remember

that?) was supposed to begreater self-

sufficiency. British farmers saw hiked

tariffs on imports as a chance to make

hay — and bacon, butter and

strawberries while the sun shone.—

Too late. Empty supermarket

shelves underline the need to

produce more of the stuff we eat. The

proportion of homegrown food

purchased in the UK has fallen

steadily over the past three decades,

from 78 per cent in 1984 to about 60

per cent now.One reason is cheaper,

less regulated imports. But so, too, is

our taste for exotic fruits and

vegetables and a deep-seated inability

to rethink an ancient profession.

Britain will never have the tropical

climes necessary for bananas. But

growing crops more efficiently is

possible — even while ensuringgreater

sustainability of the environment.

Thenew post-Brexit agriculture bill

largely ignores the former.Vertical

farming akes equal sense in urbanm

outskirts. Nurturing vegetablesin a

climate-controlled environment

means immunity from fluctuating

weather conditions.Prices could fall.

Farming practices cannot be

changed overnight. But eating habits

can. Shore Capital estimates 20-

per cent of the UK’s calorific intake

will switch fromeating out to the

home amid the coronavirus crisis.

Supermarkets usually keep five to 10

days’ worth of produce on hand and

supply chains are already snagging.

Numbers from supermarkets show

the shopper’s instinct is to hoard. Yet

almost one in five Britons can only

afford to replenish the larder when it

is empty. Over to the farmers.

I

n the fight to stop the coronavirus

outbreak destabilising the global

economy, central banks aveh

gone “all in” with intervention

after intervention tocalm capital

markets.

Governments are following closely

behind, announcing massive spending

initiatives to shield their economies

fromdeep recessions. When the pan-

demic eventually recedes, the effects of

these actions will continue to be felt.

This introduces another element of

uncertainty for those trying to plot the

course of an eventual recovery in equi-

tiesandotherassetclasses.

In a world where countries are

becoming islands and cities are becom-

ing households, fearful investors are

hoarding cash, in particular US dollars.

A painful reckoning is taking place

across global markets after a decade-

long debt binge. No asset class is safe,

apart from short-dated US Treasury

bills. As their prices surged, the implied

yields on these securities — seen as cash

equivalents —edged below zero uringd

this week’s frenetic trading across equi-

ties, credit, currencies, government

debtandoil.

Theusuallyreliablemethodofportfo-

lio insurance, through buyinggoldor

long-dated government bonds that do

well when riskier assets suffer, has not

beenspared.

Some investors need cash to meet

redemptions from funds they manage

or to pay back collateral on positions

that continue to sink below the water

line. Others have clearly elected to

stockpile cash while waiting for the

extrememarketvolatilitytoabate.

A strengtheningUS dollar ighlightsh

the magnitude of this global deleverag-

ing. Across all asset classes, the exit

trade is rapacious and the flight from

emerging markets is starkly illustrated

by the Institute of International

Finance. According toits figures, EM

outflows since late January are already

twice that of aperiod during the global

financial crisis and much bigger than in

the2014“tapertantrum”,forexample.

Investors accustomed to boom and

bust may well look at thecurrent envi-

ronment and see signs of a good long-

term buying opportunity. Big drops are

followed by large recoveries. But this

year’seventsaredifferent.

A pandemic of indeterminate length

iscausingaprofoundeconomicslump—

one that shuts the door on businesses

and their workers, particularly those in

the gig economy, creating hardship for

many who depend entirely on their

weeklyormonthlypaycheques.

The spectre of a solvency crisis for the

broader economy has jolted central

banksandgovernmentsintoaction.

Policymakers’ efforts are crucial to

stem the economic damage, but this is

an environment where — rather than

waiting for green shoots in economic

data — the only statistic that counts is

evidenceofCovid-19peaking.Onlythen

can investors really start assessing just

whatkindofrecoverybeckonsandwhat

representsfairvalueforassetprices.

Alan Ruskin at Deutsche Bank argues

that optimism in an eventual V-shaped

recovery is “next to impossible when

the real economy is only starting the

downside of the V at a historic pace of

descent. We are too soon into social dis-

tancing to start seeing its end, which is

thecoremetricforriskrecovery.”

Calling the bottom is a daunting task.

But for investors with a long time hori-

zon, there is an opportunity to buy

assets that have endured a hefty down-

grade,perhapsinsmallbites.

Rob Arnott, founder of Research

Affiliates, says those investors will have

to strike in the next few months — as

“once the pandemic is beginning to

ebb”, he argues, the moment will have

passed. “The window of opportunity

will be short, but highly rewarding over

thelongerterm.”

Anotherlong-termchallengeinvolves

assessing the post-pandemic terrain for

companiesandeconomies.

Deep recessions often clear out the

dead wood from the previous economic

cycle, and that facilitates a rapid recov-

ery. Companies that survive the coming

wave of defaults will become stronger as

competition withers, while the likely

changes in how people work and inter-

act presentopportunitiesforcompanies

beyondthecurrentcrisis.Thatmaywell

invigoratethenextbusinesscycle.

There is also the chance that govern-

ments and central banks do notscale

backtheirpronouncedpresenceinmar-

kets and the economy once thecrisis

passes. There is plenty of scope for cen-

tral banks to monetise a vast rise in gov-

ernmentspending,giventhescaleofthe

potentialeconomicdamagelooming.

Pumping money directly into the

hands of people and companies, rather

than banks as was done in the wake of

the 2008 financial crisis, will no doubt

provepopular—particularlyasitstands

to boost the economic rebound. But it is

also likely to create much higher infla-

tiondowntheroad.

Investorswilladjustandfindthedriv-

ers of the next bull market, but they

must also navigate profound changes

across the economic and financial sys-

tem. In that sense, the fallout from the

coronavirus outbreak will continue to

loom over the investment landscape in

theyearsahead.

[email protected]

Virus fightback will

make lasting changes

to world’s economies

Source: Department for Environment, Food and Rural Aairs

British self-suiciency by commodity ()

Food security: the lie of the land

 









Cereals 

Sugar 

Fresh vegetables 

Pork 

Beef 

Poultry 

Milk 

Cheese 

Eggs 

Supermodel Naomi Campbell travels in

a hazmat suit. The Kardashians have

gone into quarantine. No one could

accuse celebrities of making light of the

Covid-19 crisis. But the rich and

famous are coming under fire for

getting diagnosed. They are accused of

queue-jumping in countries where

shortages of coronavirus tests ffecta

even healthcare workers.

Fair? Hardly. But that is the “story of

life” as US President Donald Trump put

it bluntly. Plenty of people are willing

to fork out a few hundred dollars to

Coronavirus tests:

trial and error

Twitter: FTLex@

Investors accustomed to

boom and bust may well

see signs of a long-term

buying opportunity

MARCH 21 2020 Section:FrontBack Time: 3/202020/ - 18:40 User:andy.puttnam Page Name:1BACK, Part,Page,Edition:EUR , 18, 1