Page 18 - DIY Investor Magazine Issue 24

HOW IS THE ECONOMY GOING TO BOUNCE BACK?
Markets continue to be amazingly volatile: in general, we do not expect to see market changes of that magnitude in a bull market, they are much more associated with bear markets and we are probably not out of the woods yet.
In addition, we are facing a material collapse in GDP as large swathes of the economy are closed down and we are beginning to consider the extent of any bounce-back once these controls are lifted.
It is perhaps easiest to put these considerations in the context of individual businesses; take for example hairdressers; the longer people are confined to their homes, the more dishevelled they will start to look.
‘WE ARE FACING A MATERIAL COLLAPSE IN GDP AS LARGE SWATHES OF THE ECONOMY ARE CLOSED DOWN’
Hairdressers lost custom as their clients were prevented from going to salons but once the quarantine is lifted, people will rush back, and hairdressers can expect a surge in demand. However, the longer the lockdown, the more business hairdressers will miss out on; this
is different to the structural damage to the economy experienced in 2008 when the banking sector was on its knees.
Currently, the immediate damage is less structural but the longer we remain in this crisis, the greater the risk as sections of the fabric of the economy start to deteriorate. Beyond the lockdown, it is becoming clear that we cannot eliminate this virus in the short-term and that we must learn to live with it.
China and Korea might offer some ideas of how greater controls can be put in place to halt the spread of the disease without resorting to shutting down the economy; each has used technology as part of the solution.
In China people have been given an App for their mobiles which register red, amber or green depending on the risk they pose in spreading Covid-19.
A green display confirms that the holder has not been
in close contact with anyone infected and can travel relatively freely; if an individual has had some association the app flashes amber and some restrictions on travel are imposed.
A red display confirms a close association with the virus, potentially a member of the immediate household has the illness, or the individual resides in an area where there has been a fresh outbreak; then self-isolation is expected.
Korea has a similar system and although its use is more voluntarily, it is nonetheless incredibly sophisticated; people are able to flash a QR code on a particular train carriage or bus that they wish to travel on.
If someone on that carriage subsequently contracts Covid-19, their fellow passengers are alerted and encouraged to stay at home; those travelling in other carriages or buses are unlikely to have had contact with the virus and are at little risk of contracting the disease.
This demonstrates that there are ways of managing people’s movement without resorting to full-scale quarantine which allow businesses to gradually get back on their feet.
The hope is that measures like these will be put in place in Europe and the UK in the coming months.
DIY Investor Magazine | Apr 2020 18