Capital market outlook: Coronavirus acting as a catalyst

  • Following emergency action from the central banks, governments are now providing additional support with fiscal stimulus measures

  • The recent monetary and fiscal support packages are more extensive than those implemented during the financial crisis

  • The coronavirus crisis is accelerating existing trends in the capital markets

  • The pandemic has cemented low interest rates – risk assets remain a favourite


Jens Wilhelm


Jens Wilhelm

Member of the board of Managing Directors of Union Investment

Responsible for portfolio management

Frankfurt, 25 June 2020 – Coronavirus is going to have a defining influence on the capital market environment of the early 2020s. Jens Wilhelm, member of the Board of Managing Directors of Union Investment responsible for portfolio management, expects that the announced monetary and fiscal policy measures will provide extensive support for the capital markets. “The coronavirus crisis is acting as a catalyst for the acceleration of existing investment trends. A higher – but carefully managed – level of risk, a more active approach and a stronger focus on security selection are the right course of action in response to this shift.”

From a macroeconomic perspective, Wilhelm regards the coronavirus crisis as the biggest challenge since the end of the Second World War. “This time, the economy has crashed much faster and twice as deep as during the financial crisis,” he explains. According to Union Investment’s latest forecasts, the GDP of the eurozone will shrink by 8.5 per cent in 2020. With a fall in GDP of ‘just’ 6.7 per cent, Germany will weather the crisis comparatively well. Italy and Spain, on the other hand, will be hit particularly hard with predicted contractions of 11.7 per cent and 11.5 per cent respectively. Even the US, which had been a bastion of economic stability in recent years, will suffer a painful 7.0 per cent decline in GDP. “Based on our forecasts, we expect US unemployment to rise to nearly 20 per cent – an unprecedented event in recent economic history,” says Wilhelm.

The recent monetary and fiscal support packages are more extensive than those implemented during the financial crisis

It seems likely that the economic downturn will bottom out in the second quarter of 2020. “The recently adopted monetary and fiscal support packages are more extensive than those implemented during the financial crisis, and they are proving effective,” says Wilhelm and adds with confidence: “The worst of the market turmoil is already behind us.” He does anticipate another rise in the number of infections in the autumn of 2020, but argues that “governments, economies and society are now much better prepared and should not be taken by surprise this time. The impact of a second wave on the capital markets will therefore be much more moderate.” Nevertheless, Wilhelm does not believe in a swift, V-shaped recovery. “We will see the beginnings of a recovery in the second half of 2020, but it will be very gradual.”

He foresees moderate growth and no inflationary pressure for the time being. “Concerns about a rapid rise in inflation are unfounded.” Wilhelm acknowledges that the prices of certain goods could rise temporarily as a result of the crisis. But his expectation for the medium and long term is a prolonged period of weak aggregate demand that will mute inflationary pressure.

In Wilhelm’s opinion, the support measures implemented by governments and central banks are crucial pillars in the fight against this crisis. “In terms of monetary and fiscal policy responses, a lot of good decisions have been made in the coronavirus crisis,” he concludes. Looking ahead, he expects the focus of economic policy to remain on stimulating growth rather than reducing public deficits. “It will a while before austerity makes a comeback,” he says with conviction. “We now have a period of structurally higher public debt ratios ahead of us.” Wilhelm expects that further monetary policy measures will be put in place to ensure that global sovereign debt levels remain sustainable. “The central banks are going to expand their role as a lender in the government bond market. This will depress yields for years to come.”

He believes that this support will be particularly important for the eurozone. Economic conditions in countries such as Italy were already difficult before the coronavirus outbreak. Now, these countries’ ability to service their debt is being further eroded by the slump in growth and the cost of economic support measures adopted by governments. “The actions of the European Central Bank and the proposals for a recovery fund have addressed this issue effectively,” Wilhelm concludes with regard to recent decisions at European level. He predicts that “political risk premiums for investments in the eurozone are going to fall”. This should also support the external value of the euro.

Coronavirus as a catalyst – trends such as deglobalisation, market consolidation and sustainability are being accelerated

Wilhelm believes that globalisation will continue to slow: “We will not see large-scale campaigns to relocate industrial production back to western countries. But governments are going to press for an increase in domestic production capacity for critically important goods such as protective equipment and vaccines.”

He also points to a reality that many companies have had to face in this crisis: “The coronavirus crisis has laid bare the vulnerability of global supply chains. Companies are going to learn from this experience.” He expects that businesses will respond by maintaining higher inventories and shortening their supply chains. As a result, the downward trend in the growth of international trade, which has been observable for several years, is going to accelerate. “Globalisation is going to lose traction as a driver of prosperity and growth,” Wilhelm predicts.

He anticipates that the pandemic will also have far-reaching consequences with regard to market structures. “Strong companies are going to emerge even stronger,” he predicts, while many companies that had already been ailing before the crisis will probably disappear from the market. “The crisis is going to trigger a consolidation in many industries,” Wilhelm concludes. But he believes that this will create scope for margin and profit growth in the future. “It will be important to take these shifts into account when selecting equities and corporate bonds. Quality will be more decisive than ever.” In his opinion, historically high price levels could be justified for top-quality securities.

Wilhelm thinks that the importance of sustainable investing will continue to grow. “Investors are frequently faced with sustainability-related questions as they navigate the current crisis – from the growing appeal of the healthcare sector to the way in which shareholder rights can be exercised at virtual annual general meetings,” he explains. In his opinion, sustainability will play a central role in shaping the future of investing.

The pandemic has cemented low interest rates – risk assets remain a favourite

Despite the uncertainty in connection with coronavirus, Wilhelm sees signs of a further consolidation of investment trends that emerged in recent years. “The environment of low or even negative interest rates will not just persist but intensify and expand,” he predicts. Investors will thus be facing even more difficult investment conditions. “Safe-haven government bonds will continue to generate little or no return. In addition, the huge volume of new issues being placed as governments take on more debt will curb the potential of these bonds to perform well,” he points out with regard to the bleak outlook for this asset class. Corporate bonds are therefore among his favourite investment options, especially in terms of the balance of opportunities and risks.

He is also convinced that “the equity market remains the segment that offers the greatest opportunities”. In his opinion, the German DAX index could rise to 13,300 points over the next twelve months. “However, careful stock-picking will be more important than ever,” he emphasizes. Wilhelm also regards commodities as attractive, although they are susceptible to volatility. “Production limits and weak demand are putting a cap on the oil price. But precious and industrial metals are still offering attractive opportunities to establish positions,” he says.

“Coronavirus is going to be a dominant topic of this decade and its impact will be just as enduring as that of the financial crisis,” Wilhelm concludes. In his opinion, the most powerful effect of the pandemic will be its function as a catalyst. “This crisis is accelerating existing trends such as deglobalisation, market consolidation and sustainability. In the stock markets, some securities – like technology stocks – benefit from the crisis while others, for example stocks from the aviation and tourism sectors, have been hit extremely hard,” Wilhelm sums up. “Investors can use an active asset management approach to take advantage of these trends.”


As at 23 June 2020