Panic in the markets! What shall we do?

The march 10, 2020

Since Monday, a storm has hit the global financial markets: the French 'CAC 40' has lost more than 8% in a single day (with a loss of more than 1,500 points since the start of the year).
The coronavirus seems to be the main catalyst. Indeed, and logically, the markets are anticipating the economic slowdown linked to the confinement of the population and the fall in world trade.
The first economic players affected are all industries related to tourism as well as airlines, such as AIR FRANCE which already offers its employees to ask for holidays, or even unpaid holidays.

Last Friday, OPEC members, chaired by Saudi Arabia, decided to regulate and reduce oil production so as to maintain prices in the face of global demand which is mechanically falling due to this health crisis.
Russia, the world's second largest producer (not a member of OPEC), decides, unlike OPEC, to maintain its production volume.
Saudi Arabia stung in the heat, in reaction to the Russian decision, announces that it wants to lower its price and flood the market with its black gold.

It did not take less to panic the world financial markets, first of all the Gulf countries whose economy is almost entirely dependent on oil with Kuwait which had to close its stock market quotation after a fall of more than 10%, but also the USA which produce a lot of shale gas, and for whom, given their production costs, this level of oil prices is unsustainable.
It even resulted in a significant drop in the Russian ruble.

Being in a globalized economy, everything is linked and connected, a little too much...

Wealth A7, through its private management, had anticipated this sudden fluctuation in the markets and had arbitrated all of its client portfolios in early January with a very defensive strategy while all of the macroeconomic indicators (OECD, IMF etc. …) and companies' results were green.

This choice turns out to be very profitable!

At Wealth A7, we believe that we are going to start a real economic recession (negative GDP growth) which will de facto lead to a corporate debt crisis, which will result in defaults. Indeed, with corporate cash funds of less than 2 months (which is the case for service companies), many of them will not be able to hold out.

In terms of financial investments, the “High Yield” and certain corporate bonds will initially be concerned.

Secondly, even if central banks buy corporate bonds to support them, the fact remains that they will not be able to act on the real economy. A global health crisis cannot be resolved by injecting cash!

This recession will result in an economic crisis which will cause an increase in redundancies and unemployment with a high risk of property crash.
Because real estate prices in major cities like Toulouse and Bordeaux are already well above the index of the Friggit tunnel (an economic indicator that measures the correlation of property prices and average household income). According to this angle of analysis, they are overvalued (we will devote another article explaining why the real estate in Toulouse is too high and why in general we have a real real estate bubble in France in the big cities). So imagine the situation if household incomes collapse!

 

Given all this information, a good heritage strategy to manage and preserve its heritage is essential.
So don't waste any more time,
contact Wealth A7 to benefit from recognized expertise and personalized advice in wealth management in Toulouse.

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Article by : Etienne KAJOIN

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