Facing epidemics, we must know capital allocation

The COVID-19 epidemic disrupted people life and affected the previous economic environment. It is still unknown whether central banks of various countries use the QE policy that could breaks dilemma or not. Investors' assets have shrunk, and in the face of an investment environment that cannot be judged by past experience, what will happen to future capital investment?

The worst economic recession in history

COVID-19, the epidemic bring the world to another ice period, cities blocked, fight canceled, countries clocked, the world seemed to be still. The sudden stagnation of economical activity made investors feel at a loss, and the economic performance showed a cliff-like decline in an instant, and the recession was worse than in the past financial turmoil. During the 2008 financial crisis, U.S. stocks fell 53.3% in 17 months, but they lost 34% of their market value within a month of this year. Neither European stocks nor China have escaped the recession.

                         25years global GDP(source from Macromicro)

Unlike the past, most of the recession economies accounted for less than 50% of the global economy in the past 100 years. But this time, almost every country in the world has entered a dark period, with recessive economies accounting for almost 100% of the world.

                       1871-2021 Share of recessive economies (Source: World Bank)

In the past, stocks and bonds were complementary assets. But this time, the stock and bond markets were decoupled and hot money poured into the bond market, but the 10-year bond yield fell to unprecedented record 1%. The price of oil futures also changed from positive to negative overnight, and even fell to a price of minus 40 dollars per barrel. A derailed financial environment makes capital investment more difficult.

Global unemployment rate high unprecedentedly 

During the epidemic, many companies responded with unpaid leave or pay cuts. Further, the world's largest health food brand GNC, the well-known US department store JC Penny, the well-known art performance Cirque du Soleil, and other companies were unable to withstand the epidemic and declared bankruptcy, causing a large number of people to lose their jobs . According to the World Bank report, the global unemployment rate will reach 7.4% this time, which is higher than last year’s 5.5%, and also higher than during the global financial crisis of 1975, 1982, 1991 and 2009.

                  Global unemployment rate during the recession of 1960-2021 (Data source: World Bank)

Low profits and negative profits become common

At the beginning of 2019, the global average interest rate was still around 3%, but governments around the world restarted QE, interest rates continued to decrease, and negative debt bonds also appeared. For example, German bonds have entered a period of negative colony interest rates. Japan and France’s public debt within 15 years, Belgium 10-year bonds and Netherlands 10-year bonds are all negative interest rates. In addition to the QE, interest rates in July 2019 began to fall under the entanglement of the Sino-US trade war and the COVID-19. Coupled with the severe epidemic, the global average interest rate fell to 1.6%. With the possibility of the resurgence of the second wave of outbreaks, low and negative profits will become common in the future, and the high interest rates in the past will no longer be seen in major or developing economy.

                         Global policy interest rate (Source: World Bank)

Inflation drops, economy stagnate

In addition to economic performance, unemployment and interest rates, countries also face the dilemma of falling inflation. The Fed predicts that inflation will fall from 1.9% previously to 0.8%, and next year's forecast is 1.5%. The World Bank estimates that inflation in the United States and the European Union will fall to 0.6% this year, the five ASEAN Congresses will be 1.8%, and China may maintain it at 3%. The declining inflation rate makes stagnant economy more severe.

                      Inflation rate in major countries (Data source: World Bank)

Savings first, consumption downgrade

Unpaid leave, pay cuts, and unemployment, all the factors have forced the public to reduce spending, the uncertainty of the epidemic, and the lack of optimism about the economic prospects, so that people who have no savings habits have begun to keep cash in their pocket. Taking the United States as an example, the American savings rate has remained at around 8% for many years. But after the epidemic outbreak in the United States, the country's savings rate rose to 33% within two months. The reduction of consumption by the people has brought business activities to a halt, and economic recovery still unknown.

                           American household saving rate (%)

Improve the fixed income ratio to cope with future uncertainties

Facing with an uncertain future, investors should increase the ratio of fixed income assets and seek stability in insurance. It is recommended that investors can put 50-60% of their investment in fixed assets, 20-30% of cash in hand to meet the needs of business and life, and only leave 10-20% of their funds in risky assets. Only by increasing the proportion of fixed-income products and reducing investment risks can we move forward stably in this situation of instability.