Four months ago, the COVID-19 pandemic reached the developed world. Despite warnings from China and the World Health Organization (WHO) about the severity of the situation, the Western world was taken by surprise.
From governments to citizens, businesses to households, the virus affected societies in a way not known before. As a consequence, the economy changed dramatically, with many questioning the very existence of capitalism.
Bankruptcies, State Aid and Guarded Optimism
Any recession takes its economic victims. Traders and investors remember very well the Lehman Brothers collapse at the height of the 2008-2009 Great Financial Crisis. Bankruptcies always remind us of the fragility of an economy and how quickly things turn around.
At the start of this year, the U.S. economy ran at almost full employment, the Non-Farm Payrolls (NFP) registered a record streak of over a 100 months of job creation, and the federal funds rate reflected the solid economic performance.
Fast forward six months, and the new reality paints an incredible picture – bankruptcies, state aid for companies and households, and moderate or guarded optimism.
Hertz, the car rental giant, filed for bankruptcy in the United States. Wirecard, an online payment processor giant, part of the German Xetra Dax index, filed for insolvency after over a billion Euro was found missing from its accounts.
Lufthansa, one of the largest airlines in the world, requested help from the German state in exchange for equity and a few seats on its board. Chesapeake Energy, an emblematic U.S. energy company, filed for bankruptcy too.
The rise in bankruptcies and insolvencies is expected to be related to the length of the health crisis. The more it takes until a vaccine comes out, the more likely it is that companies will find it exceedingly difficult to cope with the new reality without help from the state. However, as the Lufthansa case shows up, the state may give a hand, but it also requires something in exchange – nationalization through the back door?
As we are close to the end of June, there is an uptick in coronavirus infections in the United States. While consumer confidence rebounded sharply in May, the decline in incomes suggests vulnerability ahead if the infection rate does not come down soon enough.
Europe seems to have weathered the health crisis a bit better. As a result, there’s optimism reflected in the sharp rebound in the PMIs for June.
But the overall impression is that the world’s economy barely adapts to the new reality, rather than recovering. It makes sense for investors to remain on guard and be selective moving forward.