Ray Dalio: Preliminary Analysis of Coronavirus Impact on Global Economy

First, let me make it clear: I am "a piece of white paper" in the field of epidemics. However, it is precisely because I do not know the professional knowledge that I can objectively analyze from the perspective of outsiders. My colleagues in Qiaoshui and I don't know to what extent the virus will spread. We don't know where it will spread, nor will it know its impact on the economy or the market. However, we do know that although a major epidemic is one of the major events that we have never really experienced in our lives, similar events have repeatedly occurred and had a significant impact in other eras-as if other Major events in your life, such as the World War, the end of the monetary system, or a century-long drought or flood. Following my usual analytical approach, I will be (a) studying some other major infectious diseases and figuring out what they are all about, and (b) ensuring that our portfolio is sufficiently diversified or hedged to ensure that we are not against any Unnecessary and small wins.

As for the spread of this virus, like any unidentified factor, they are 1) real events and 2) expectations of these events will be reflected in market pricing. Generally speaking, these negative events that are unforgettable in life will be initially slighted. As you continue to develop, people become overly concerned until some fundamental factor that can turn the situation around (for example, the development of a virus changes from accelerated to decayed). Therefore, we need to focus on what actually happens, what people think is happening and has been reflected in pricing (as distinct from what might happen), and those indicators that indicate reversals.

Diversification can protect us from losses caused by unknown factors, and the outbreak of coronavirus and its impact on the market has become even more important. Since the outbreak of the virus, Chinese stock markets have fallen by almost 10%. Terrible, unimaginable things can happen anywhere. We don't know much more than we know. When you don't have much information, the best investment strategy is to make a wise and diversified investment across different geographic locations, asset classes and currencies.

For this event

The main purpose of these observations is to show you what we have observed in the past, in an attempt to smooth the evolution of this coronavirus event and the typical viral pandemics (which can be seen as Similarities and differences between multiple coronavirus events). We will also study the relationship between past epidemics and their impact on the economy and markets, and identify some of the more precise effects.

Recent historical cases

The table below shows the major outbreaks and mortality rates in history to show their severity. The number of deaths shows that the last major epidemic-and the only one with such a large number of deaths-was the one that happened almost 100 years ago.

Let's look at the three worst cases: H1N1, SARS and Spanish flu. Here are some of our observations.

  • For the first two smaller cases, in the days when the media reported headlines about disease outbreaks, the market adopted a hedging strategy. This coincides with the decline of growth targets and the influx of high-quality targets, that is, stocks fall and gold and bonds rise (as seen in the past few days). However, as other effects unrelated to the virus (such as monetary policy and economic activity) are more important, these reactions have gradually disappeared, and the market has no significant and sustained action. By the way, when referring to these cases, keep in mind that this is not a sufficiently large sample, and that some coincidences should not be interpreted too much-for example, the H1N1 flu is related to the recovery that began after the 2008 financial crisis- Therefore, one should be cautious about the relevance.
  • The larger scale of Spanish flu has a much greater impact on markets and the economy.

Let's look at each of these epidemic cases separately.

H1N1 (Avian Influenza): 2009 to 2010

The outbreak involved a variant of the same virus as the Spanish flu (H1N1) of 1918. The first case was detected in Mexico in March 2009. Unlike other epidemics of the time, the virus did not overinfect adults over 60 years of age. The estimated total number of deaths is wide (because laboratory tests are needed to distinguish between deaths from the disease and those from conventional seasonal flu), but the latest estimates from the World Health Organization indicate that at least 150,000 people have died, It's even doubling-a number that is significant, but not excessive (compared to 1.25 million deaths in car accidents each year). The World Health Organization announced on August 10, 2010 that the epidemic was over.

SARS: 2003

SARS Coronavirus is an animal virus that initially only spread to other animals, but eventually infected humans. The first case was discovered on November 16, 2002 in Guangdong Province, southern China. SARS spread to 26 countries, infected 8,000 people and killed approximately 800 people. The first infected persons arrived in Hong Kong in February and the condition spread rapidly. In mid-March, the World Health Organization issued global alerts and emergency travel advice on SARS. In late March, data on newly infected cases began to be released (as shown in the figure below). On July 9, 2003, the World Health Organization announced that the virus was contained. Except for a brief outbreak in 2004, it was indeed suppressed.

You can see the impact of the epidemic through the difference between the Hong Kong stock market and the global stock market in the chart below. You can see that the Hong Kong stock market was adversely affected by SARS and reversed when the number of SARS cases peaked and started to decline. This is entirely logical. If the coronavirus crisis is still concentrated in China, this will also be our expected market behavior. In other words, we expect that its impact on the Chinese and Hong Kong markets will be greater than its impact on the global market, and these impacts will decrease as the number of new cases decreases.

Spanish Flu: 1918

This is the deadliest epidemic in modern history. Although the virus is believed to have originated in China, the first patient was discovered on March 4, 1918 at Finston Military Camp, Kansas. A cook at an army base reported flu-like symptoms to the infirmary-mild fever and mild sore throat. By noon, 107 people felt unwell. Within two days, 522 people were infected. Within a week, every state in the United States was affected. The disease subsequently spread to the Atlantic. By mid-April, it had spread to China and Japan. By May it was almost everywhere.

Importantly, the virus outbreak occurred during the First World War, which exacerbated the severity of the outbreak (malnutrition during wartime, poor sanitation, and the dense housing of soldiers provided ideals for the spread of the disease condition). It is estimated that nearly 500 million people have been infected and about 50 million have been killed (though estimates vary by calibre). In the end, the disease killed far more people than the victims of World War I. After about 18 months, the disease has quietly gone.

The impact of the war and the epidemic is difficult to distinguish on the relevant charts of the market and the economy, but it seems that the favorable development of the war (the peak of the disease roughly matches the end of the war) and cannot bear the negative effects of the epidemic, leading to the stock market The end of a round of rising prices. In addition, a report by the Federal Reserve Bank of St. Louis surveyed newspapers during this period to analyze the economic impact of the flu. As expected, the report sorted out some headlines describing the sharp decline in the U.S. economy, such as:

  • "Coal mine operator reports a 50% reduction in production"
  • "Pan Influenza Destroy Memphis Industry"
  • "Little Rock merchants report a 40% drop in sales. Other calibers estimate a 70% drop."
  • "Retail Store Sales Cut by a Third"

Once again, these situations occurred at the same time as the end of the First World War, and there were not many monthly economic statistics to refer to, so it is difficult to clearly see the impact on the economy and it is difficult to counter the epidemic The impact of the market is distinguished from the impact of war development and other policies.

How to contact this coronavirus outbreak

Here are some actual situations.

  • In early December, the first case was discovered. According to the World Health Organization (WHO) on Sunday, a total of 2014 infections were reported worldwide. among them:
  • 1985 cases were from Greater China and 29 were overseas.
  • Of the 29 overseas cases, 26 have been to Wuhan. Two of the remaining three had close contact with other cases infected in Wuhan (not enough information about the third case).
  • According to the WHO definition, 324 cases (slightly more than 15% of the total number of cases) are in critical condition.
  • There were 56 deaths with a mortality rate of approximately 2.5% to 3% (the final mortality rate for SARS was slightly below 10%). These deaths are mainly elderly patients or patients with previous health problems.
  • As of this writing, the latest figures reported by Chinese state media are 2844 cases and 81 deaths.

So far, compared with the SARS epidemic, China ’s response has been more transparent and decisive. This has not only positively affected the results of statistical comparisons, but has also accelerated the speed of problem resolution. As the Chinese government reported the disease to WHO more quickly, quarantine and other preventive measures were implemented in a timely manner. Because these measures have had a positive impact on curbing the spread of the virus, the World Health Organization praises China's rapid response.

The chart below shows the market trend over the past few weeks, with dots indicating some important development intercepts. As shown in the figure below, in the past few days, the growth target market has shown a strong downward trend, and investment has shifted to high-quality target markets. Globally, investors have sold stocks, while bonds, gold and the dollar have risen against the yuan.

These are just our initial observations. We expect to do more research, which will give us a richer perspective. We will share new relevant results with you as the research progresses.

Source link: www.linkedin.com

Original title: "[Latest Chinese translation] Bridge Water Fund: Our Early Thinking on the Coronavirus and Pandemics"

Written by: Ray Dalio, Chief Investment Officer and Co-Chairman of Bridgewater Investment

Compilation: AIWM International Wealth Management