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
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