2020 has been a tumultuous year, the coronavirus (COVID-19) pandemic has made itself felt in every corner of the globe, taking a heavy toll on human lives and economic activity. A third of the world is currently on some form of lockdown and we are all facing a very different daily reality. Fortunately technology has enabled certain industries to continue to trade and do business during this global crisis. Interventions by governments the world over including rate cuts by most central banks and simultaneous roll-outs of financial stimulus packages into their respective economies, has prevented a global financial catastrophe. With over 3 Million confirmed cases worldwide, and the death toll now over 208,000, the geopolitical and socio-economic ripple effects that the COVID-19 pandemic has brought about, will impact society and the global economy for years to come. The virus outbreak started in China in December of 2019, in only 4 months has spread across 6 continents, Antarctica being the only continent that is still coronavirus-free.
The 1st quarter of 2020 saw the negative impact of the COVID-19 pandemic on all types of assets, including many traditional safe-havens like government bonds. Uncertainty continues to prevail on investor sentiment mainly because the extent and severity of the pandemic and its impact on economic growth remains unknown. The IMF have warned of a coming global recession worse than that of the 2008 Global Financial Crisis (GFC), ratings agency Fitch projected a 1.9% contraction in global growth for 2020, with Moody’s citing a contraction of 0.5%.
Q1 earnings and global GDP data is currently being released, these figures can help us understand the economic impact the virus has had thus far, and help to gauge the expected recovery period for the global economy. Everyone expected that China, the world’s largest producer and exporter, would post a contraction for Q1 2020, Beijing’s latest official economic data released last week shows that the country’s economy shrank by 6.8% in the first 3 months of 2020, this as compared to Q1 2019. This is the first quarterly economic contraction in China since 1992 and has ended one of the greatest streaks of continuous quarterly growth in modern history.
While we wait on other countries to release their 1st quarter data, we can look at the commodity market. The COVID-19 pandemic caused an unprecedented and abrupt stop in economic activity on both the demand and supply side. This was largely as a result of the impact of mitigation measures on industrious activity and supply chains within different regions around the world. The prices of most commodities have fallen substantially since January, especially those that are related to the transportation industry. Energy prices fell 18.4% quarter-on-quarter in Q1, with a marked deterioration throughout the quarter as the severity of COVID-19 became more widespread.
The transportation industry accounts for around 66% of global oil demand, this demand has almost completely collapsed as COVID-19 mitigation measures sharply curtailed travel and transport globally. The fall in prices was further exacerbated by the price war between Russia and OPEC during the breakdown of the existing production agreement in early March. Natural gas prices have also seen continued sizeable declines, the price of natural gas futures fell to the lowest level since 1995 when the price traded to a low of $1.519 in March 2020. Coal prices have seen smaller declines mainly because the demand for heating and electricity has been less adversely affected by COVID-19 mitigation measures. The metals and minerals price index fell 5% on the quarter but had significant variation among its components. Gold prices rose by 6% in Q1 amid heightened stock market uncertainty with safe-haven inflows from private, public and commercial investment. Platinum prices have dropped by over 23%, platinum is predominantly used in the production of catalytic converters within the transportation industry. Copper and Zinc prices declined by around 15% relative to their January peak and reflects the close relationship with global economic activity. Agricultural commodity prices saw only minor declines during the first quarter of 2020 reflecting this sector’s indirect relationship to economic growth.
As the rest of the world continues to impose lockdowns, strict travel and trade regulations along with other containment measures to combat and prevent the spread of the raging COVID-19 virus, China is now finally through the gauntlet. As at 27 April 2020 China have only reported 3 new cases, and have returned to a reduced rate of economic and social activity.
Austen Morris Associates is extremely proud to be celebrating its 26th year in business this May. The company along with the majority of our clients, have been through all of the major economic downturns over the past 25 years. We have always emerged stronger and wiser after they have occurred, the COVID-19 pandemic will be no different. Although experts can’t predict when the world will get through this pandemic, we do know that with continued social distancing measures, travel bans and an eventual vaccine, COVID-19 will be overcome and eventually be only a focal point in our history, that we can learn from and reflect back on as a global society.
Austen Morris Associates will continue to add value and serve our clients throughout these uncertain times, guiding and supporting you during volatile market conditions, providing meaningful insight and unbiased professional advice, ultimately helping you weather this current storm and finding opportunities during times of adversity. Our global Consultants are online and available to review your existing investments, or to advise you on new investment opportunities that have recently become available.
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