NERB：On March 9th, global stock markets encountered “Black Monday” and the US stocks also triggered a “circuit breaker”. How long will this market shock last? Does it mean the beginning of the global financial crisis?
Michele Wucker：We will continue to see a lot of volatility for a while, particularly because this shock is not just about the effect of the coronavirus on the global economy but also about existing financial fragilities that in many ways are bigger than 2008. To be sure, the coronavirus will push the global economy into recession because of all of the disruptions. But we already were at the end of a long expansion cycle and seeing weaknesses that smart analysts have been warning about for a while. In the US, earnings were contracting and capital investment falling in many sectors. Much of the bull market had been driven by corporations who used Trump"s tax cut to buy back their own shares, but buybacks were beginning to fall off. Companies have record debt levels, with the International Monetary Fund having warned that more and more companies would have trouble servicing their debts out of current earnings and instead would have to dip into their reserves. Plus this is an election year so there is campaign-related volatility that will continue.
How long the market volatility lasts depends on many factors, particularly how well policy makers respond to the market shock combined with the health emergency. The Federal Reserve has been acting aggressively to calm markets, with mixed results on different days. After shares dropped so sharply several times that they triggered temporary halts in trading, things got so bad at one point that some market participants suggested pausing trading for longer to let things calm down, as happened after 9/11. The rebound on March 13th reassured people somewhat, but don't be surprised if we see more very gloomy days again in the near future. Remember, this shock followed troubles in the repo market that the Fed has been struggling with since late last year. So it's not just the matter of the virus shock and the oil price shock, but also a matter of other already existing instabilities. On top of that, the prolonged denial from Washington over the severity of the coronavirus and the unforgivable delays in making tests available threaten to prolong the virus and make the economic impact worse. The new US declaration of emergency helped the market to bounce back Friday, but that is temporary and we will see many more ups and downs --particularly downs-- before this is over. It's unlikely the markets will stabilize until it's clear that the coronavirus has peaked and business is returning to normal. Unfortunately, there are so many unknowns that it is hard to tell.
NERB：How will China’s economy and A shares be affected by global market shocks? How long will the impact last?
Michele Wucker：I'm always hesitant to talk too much about markets because the impact on the real economy is much more important than the impact on secondary markets, and doesn't always get enough attention. That's something that too few people understand in the United States and that has been a real problem as the stock market had become significantly overvalued related to economic prospects --at least until this past week. Too many people seemed to think that a strong stock market indicates and encourages a strong economy, but the strong recent performance in the United States has had more to do with liquidity provided by the Federal Reserve and investors thinking it was a better bet to put their money in the market --particularly the companies buying back their shares-- than into the real economy, where wages have not kept up with the markets, not by a long shot. That was an indication of a weak economy that could not sustain high share prices.
China's stock market performance will depend in part on global sentiment about China versus the rest of the world. That, again, depends on perceptions of the Chinese economy and how fast it can rebound, which also depends on how fast the global economy rebounds. And like everything else, nobody will have a clear picture until we see how the virus behaves and how well the economy can come back. Longer-term supply chain decisions also will have an impact. A lot of people in the United States were shocked to hear about how many prescription drugs come from China, and that combines with a re-thinking of supply chains in general: that it's not good to have too much supply coming from one place. So that could be a longer term issue, although certainly the Chinese market is so big that manufacturers supplying Chinese companies can still do fine domestically if the economy recovers strongly.
NERB：Some people are saying that RMB is a safe asset for global capital. Do you agree with this statement?
Michele Wucker：Whenever you say "safe" or "dangerous" or "risky" you need to ask "compared to what"? Right now everything is risky in my eyes. But some people are watching China closely in the hopes that it will rebound earlier than the rest of the world because the coronavirus peaked earlier. That really depends on whether there is re-infection, and on how strongly the virus returns in the fall. It also depends on how well China manages the ongoing issue of the need to reduce debt, particularly with companies and households that have been hurt worst by the coronavirus. If the Chinese economy can work through the debt issues without destabilizing the financial system, then it will do well in attracting global capital.
In the 2008 financial crisis, the dollar strengthened despite interest rate cuts because people saw it as a safe haven. Some of that status has been damaged in the past few years because of US policies and because of comments by President Donald Trump suggesting he might try to renegotiate debt. Luckily he hasn't said anything like that recently. So the dollar has been bouncing around this time. People are still concerned about European growth and stability post-Brexit and with the combination of the virus in Italy and Italy's underlying debt issues, so they have mixed feelings about the euro. There are pros and cons with the yen because of recent economic performance and pound sterling because of Brexit. Investors want to see more internationalization of China's renminbi, but there is a paradox, because the more internationalized the renminbi becomes, the more volatility there will be. So all of the options are complicated.
NERB：At present, the prices of major commodities are falling. Will crude oil prices continue to fall?
Michele Wucker：Crude oil prices have taken a big hit, not just from the demand shock but also on the supply side as Saudi Arabia flooded the market in retaliation for Russia's break with OPEC production limits. If OPEC and Russia can come to a new agreement on supply, that would provide support for prices. But that is unlikely, partly because Russia also wants to destabilize US shale oil production. So there is a double whammy: a virus-weakened global economy and a price war. Not good.
NERB：How should investors do to deal with the risks? What safe-haven assets can investors focus on?
Michele Wucker：I know it's easier said than done, but avoiding panic is the key. Right now, safe havens may simply be assets that fall less than other ones do. For investors who didn't already have a rainy-day fund or other hedges in place to protect themselves, obviously it's too late to be thinking about that. But it's important to remember that economic and market cycles are part of the creative destruction process. It will create opportunities to buy shares at good prices on the markets, and for companies to acquire others. A lot of people make the mistake of selling too much at the bottom, or of making big decisions when they are panicked. That's when they need to turn to level headed advisers. For companies that are long-term value investments, investors will have to hold tight and trust that eventually things will get better. Companies that buy commodities to make higher-value-added products will benefit. There could be opportunities in distressed assets -whether for companies to acquire distressed firms or to buy their debt at a deep discount and benefit as the price rises when the companies recover. But those opportunities will depend on policy responses. One thing that I hope will happen is that this crisis results in major global investment in healthcare infrastructure, with funds coming from both public and private sectors. The crisis certainly has shown a need to be filled -which is what the best investments do. And past economic downturns have produced many new companies as entrepreneurs feel they have nothing left to lose. Those who experienced the 2008-9 downturn know that things do get better. It's worth remembering that --especially at the point when everything seems completely lost. As some of the analysts I admire most say, the time to get back in is the time when everyone else wants out.