The role of central banks
Since the economic crisis triggered by the coronavirus began, with the sharp falls in the financial markets in March, we have witnessed a very significant recovery in the most efficient and flexible geographies, as is the case of the United States, Britain and Switzerland. The same has not occurred in weaker geographies, as is the case in many emerging economies or even some European ones. The reality is that this substantial improvement in the world's most important financial markets contrasts significantly with the economic reality of their economies. Economic expectations have improved substantially, but actual economic data remains very depressed.
The crisis has prompted the largest intervention by central banks in history…
Since the onset of the economic crisis triggered by the Covid-19 pandemic, the leading central banks have taken an important role: they have taken the decision to drastically increase their balance sheets by pumping liquidity into the system, so restoring the confidence of most analysts and investors.
Through the various media channels, we will have all have heard about the central banks’ efforts to support economic recovery, although we are unlikely to have a clear idea of the scale of the stimulus measures.
In the case of the Fed, intervention on such a scale last happened during periods of the World War II. To put things in perspective, the Fed’s balance sheet increase during this crisis has been greater than the total sum of all the Quantitative Easing applied over the last 10 years.
… but it won’t do any good if governments do not intervene…
As investors, we must remember that this expenditure entails injections into the financial markets and allows part of the financial system to access liquidity, thereby stabilizing the markets and restoring investors’ confidence. But it never actually means distributing funds to citizens or directly increasing spending in the real economy.
The main problem with the current crisis is that part of the population is left without an income, at least temporarily, so that spending by that part of the economy collapses, possibly triggering bankruptcies and permanent business closures.
That is why one of the keys to economic recovery is for governments to directly fund these population groups so that they can carry on spending as before until the pandemic situation disappears and economic activity recovers.
… something the financial markets take for granted…
In some countries, governments have partially applied such important measures aimed at overcoming the crisis, while in other countries they have yet to act.
Nevertheless, part of the financial markets are discounting, through their valuations, that such action will be taken with some degree of certainty, and this could trigger periods of volatility in the future.
… and that will be very relevant over the next few months.
Since financial markets are partly held together by this idea of government and bank intervention, it is essential that such actions take place during the coming quarters.
BBVA in Switzerland, as it has done in previous periods of instability, is ready to take advantage of this apparently unstable situation and to turn any possible volatility on the financial markets into gains for our clients.
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Due to the economic situation that we are confronting these days, it seems relevant to discuss issues of utmost importance to investors and that, for some reason, continue to cause confusion and puzzlement, even among professional investors and analysts.
After 10 years of bull markets and one of the longest economic cycles in history, many investors refuse to think that the situation has changed; and that the most appropriate equity investment model has therefore also changed.