Year-to-date, LD Discretionary – the largest investment fund for the Cost-of-Living Allowance Fund – has delivered a negative return of -5.0 per cent, and the return is expected to fall further in the near future. Over a three-year period, LD Discretionary has delivered a return of 9.3%. A large proportion of LD Discretionary’s assets is invested in gold-backed bonds, such as Danish mortgage bonds. This contributes to LD Discretionary’s conservative risk profile and, to some extent, shields LD Discretionary’s returns from the current sharp falls in share prices on the stock markets.
Covid-19 and expectations of lower growth
The coronavirus, Covid-19, has spread to virtually every part of the world. The virus has led to significant measures being taken by the authorities, for example in Italy and now also in Denmark, to ease the pressure on the healthcare system.
The virus is putting a significant damper on economic activity. For example, the aviation industry is being hit hard due to a sharp fall in travel. The events of recent weeks in the wake of the Covid-19 virus are, overall, giving rise to considerable uncertainty and, as a result, expectations of significantly lower economic growth.
The global economy is therefore facing a significant slowdown and the risk of a global recession of varying duration. The latest figures for leading economic indicators for emerging markets, and China in particular, point sharply downwards. In Europe and the US, economic indicators are also expected to fall. Many companies have therefore lowered their expectations for future earnings.
Daily fluctuations in a volatile financial market
The stock markets reflect developments regarding the Covid-19 virus and changing expectations for economic growth. This has led to significant falls in share prices and markedly lower interest rates. The global share index has fallen by 20% since January, and yields on both German and US 10-year government bonds are at historic lows. Daily volatility in the stock markets has not been higher since the financial crisis of 2008.
The OPEC alliance recently collapsed. Oil prices subsequently fell sharply, as Saudi Arabia has proved willing and able to increase supply dramatically. In an already nervous global financial market, this led to further negative corrections in share prices.
The US central bank, the Federal Reserve, therefore cut interest rates by 0.5% in early March. Since then, the stock markets have fallen further. Monetary policy measures do not appear to be sufficient to stimulate the global economy. Further spread of the Covid-19 virus will have a significant impact on global financial markets. Fiscal policy measures are needed both to support a healthcare system under strain and to lend a helping hand to the thousands of small businesses that have come under financial pressure.
The markets in the long term
In the slightly longer term, it is to be expected that the negative economic consequences of the Covid-19 virus will subside. There is little doubt that the stock markets will begin to rise again. Historically, however, there are many examples of it taking several years for stock markets to regain their former strength. In this context, it will be crucial for governments, particularly in the US, to swiftly curb the rate at which the Covid-19 virus is spreading. If they succeed, there is hope that the financial markets will return to normal more quickly.
