Prospects for world economic growth have been overwhelmed by massive and unprecedented disruption occasioned by the coronavirus pandemic. Global recession now looks imminent. Saudi Arabia's shock decision to increase its output of oil, following a disagreement with Russia, triggered the largest single-day decline in the price of crude since the start of the Gulf War in 1991. It will continue to have a negative impact on share prices until such time as production targets are agreed. Equity markets have come under considerable pressure, pulling company valuations down to more attractive levels.
As to the future, much will depend on the success of COVID-19 containment. It is hard to see any sustained recovery until this has been achieved. In the meantime, governments have set out massive spending packages to support economic activity and central banks have cut interest rates sharply. A low oil price will also assist disposable incomes. Eventually, these factors should support a resumption of economic growth and stock markets should strengthen accordingly, once health concerns subside.
Demographics favour emerging economies. The virus appears to be more dangerous to those who either have existing health conditions or are older. While many developing markets lack social security systems and widespread access to quality healthcare, their populations tend to be younger and may be better placed to withstand the pandemic than ageing western populations.
Growth in China can be expected to rebound in the short-term if reports that the virus has been brought under control are to be believed. Once factories have rebuilt their inventory levels, they too will be dependent upon the restoration of global demand before further progress might be expected. The economy contracted sharply during the year, causing widespread ramifications elsewhere and exposing the vulnerability to sudden interruptions of lean global supply chains. The Chinese central bank responded accordingly by considerably loosening monetary policy to stave off both the ongoing effects of US trade sanctions as well as the impact of the virus. At the same time, the tensions in Hong Kong remain unresolved. While protests have virtually stopped in the face of the viral infection, a fresh wave of grievances is possible once the health picture improves.
The outlook for the Indian economy was also deteriorating before the spread of the virus gained momentum. The country faced violent protests triggered by President Modi's proposed citizenship legislation, which incorporates religious criteria into its refugee policies for the first time. Meanwhile, the government's progress on structural reform has been disappointing. The failure of a large private lender, Yes Bank, has also sparked wider concerns over the country's financial system.
Forecasts for Latin America have also been overtaken by the health crisis. Prospects were already looking difficult with social unrest in Chile and weak investment in Mexico, but there had been some signs of progress in Brazil. Household consumption has been rising, as loose central bank policy and sweeping deregulation appear to be bearing fruit. President Bolsonaro is poised to make the central bank independent and he has pushed through pension reform in the face of considerable opposition.
Despite the immediate crisis, emerging markets continue to offer long-term potential for higher growth rates than their developed peers. At the time of writing, there is still considerable uncertainty about the scale of lasting disruption from COVID-19 and the effectiveness of the different containment strategies being implemented. The economic health of countries in emerging markets has always varied widely, and the portfolio aims to invest in sound businesses with strong market positions, particularly those that will benefit from increased wealth in the middle classes.