Global and Local Market Outlook 28 April 2020

Monitoring the Global and Local

Capital Market Impact of COVID-19

Global Overview
The rapid growth of the virus until a global pandemic had to be announced by the World Health
Organization (WHO). In this outlook, we provide a groundwork for tracking infection rates globally
and locally from the most reliable sources and examining the impact on capital market activities.
We take into consideration the governmental interventions acting in the prevention to avoid both
lengthened and large value hits to their respective economies and are assisting the steepest
possible recovery.

Significant social distancing actions include government mandated, townships to nation-wide, stay-
at-home orders have demonstrated its successfulness in reducing the rate of the spread of the
virus. Nevertheless, our analysis has shown the re-opening of the economy will be slow. In the
lack of a profound medical advancement, it will be some time before regular life can begin again.
Due to this, our scrutinization of the global credit and equity markets have shown numerous
companies with weak balance sheets who do not possess the financial flexibility to endure the
sudden hit to economic activity. On the other side, core government bonds have performed strongly.
Nonetheless, further gains for US Treasuries and UK Gilts will be more restricted from here except if
the central banks change their public announcements that they do not plan to bring interest rates
lower into the negative region. Investors may be willing to diversify into alternative portfolios such
as macro funds, or real estate, provided liquidity is not an issue

Viral Statistics
Exhibits 1-3 provide our latest data regarding on the spread of the virus SARS-NCOV2, commonly
known as the coronavirus. China and South Korea have made drastic progress in controlling new
infections after following the government mandated orders of quarantining and social distancing
measures. Whether a relaxing of lockdown and other measures result in a resurgence is still to be
seen in the following weeks. Most major western economies seem to be beyond the apex of their
infection rates. As such, the spotlight turns to the direction of how rapidly new cases can fall from
their respective peaks, and how effective governments turn out to be in averting a second surge of
infections.

Exhibit 1: COVID-19 DAILY INCREASE IN CASES

Five-day moving average

Source: https://coronavirus.jhu.edu/data/new-cases Author:

SHIN THANT LIN
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Exhibit 2: COVID-19 CASES AND DEATHS BY COUNTRY
Logarithmic Scale

Source: https://coronavirus.jhu.edu/data/mortality:

Exhibit 3: COVID-19 DAILY INCREASE IN CASES

5-day moving average

Source: https://coronavirus.jhu.edu/data/new-cases

Affected Current Activity

The effect on the global economy is huge and wide. The manufacturing sector will suffer from
lasting supply chain disturbances, but the impact is the most heavily being experienced in the
services sector. Tourism and live entertainment businesses are considered among the most
intensely feeling the squeeze. While Purchasing Manager’s Indices (PMIs) have plummeted to
levels last observed in The Great Recession, markets are becoming ever more numbed to the
short-term economic information. Investors are already aware that a lot of the data arriving for the
second quarter will make for bleak comprehension, but attention is now for the most part
concentrated on how fast the global economy will have the ability to recover in the second half of
the year.

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Market Reaction
This sell-off is not remarkable in its magnitude but is in terms of speed. Energy heavy benchmarks
– including the UK market – have been hit especially given the collapse in oil prices. Market
sentiment is shifting around rapidly but remain reluctant to definitively call the bottom in risk assets
while the duration of the hit to activity remains so uncertain.

Exhibit 4: MARKET REACTION

Equity Markets
% of stock market returns year-to-date (ytd), local currency unless specified

Government Bond Markets

Basis point chan
ge in yield year-to-date (ytd)
Source: (Top) www.bloomberg.com, DAX, FTSE, Hang Seng, MSCI, Standard and Poor's, TOPIX,.MSCI indices are used for China, S.
Korea, Europe (EUR), ACWI (USD), Asia ex-JP (USD), EM (USD). Other indices used: Germany: DAX; Hong Kong: Hang Seng; Italy:
FTSE MIB; Japan; TOPIX; UK: FTSE All-Share; US: S&P 500.

It is still too soon to accurately forecast the final effect of the coronavirus on economic activity and
corporate earnings. The faster the virus is securely contained, the quicker the economic recovery in
economic activity will be, especially considering governments and central banks are taking decisive
action to bolster the economy and backing the outlook for improvement. However, the longer the
time during which social distancing measures are required, and the longer the period of decreased
travel to restrict the transfer of the infection, the larger will be the impact on corporate earnings.

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Global Equity Market Analysis by Industry
Tourism industry
Owing to the outbreak of the coronavirus, progressively more people will select the option to stay at
home instead of going outside in order to avoid the disease. Usually, March is the time when most
universities have spring breaks and students will go traveling. However, they may consider
cancelling the trips to protect themselves. Additionally, current travel bans are instated by different
countries. Due to the great quantity of revocation and an uncertain future, the travel-related
industry will be adversely affected.
The online travel agencies such as Booking and Expedia are the first to be adversely affected.
These online travel agencies make money from each reservation they sell. As Soon As people
withdraw their reservations or stop traveling, these agencies will be losing revenue.
It also negatively impacts the hotel industry. Marriott International Inc., the world’s largest hotel
company, said it is beginning to lay off tens of thousands of employees, ramping up hotel closures
around the world.
In addition, individuals who are not inclined to travel also have an impact on public transportation
companies and hotel companies. Since the virus may infect people through aerosols, public
transportation such as airlines, trains, and buses; confined spaces with a lot of people are not safe.
Due to this concern, people will decrease the frequency of taking these methods of transport
services.
Looking at data relating to outbound flight bookings from China for March and April, a reduction of
approximately 56% from the same period last year due. In particular, booking to the United States
of America dropped by 63%. We also looked at historical data relating to SARS. During the SARS
outbreak, US airline stocks’ prices dropped by more than 30%.
Another trendy mode of transportation is cruises. The recent news about the Diamond Princess
cruise ship, where 3500 passengers remained on board for 14 days and 700 passengers were
confirmed to be infected, drastically reduced the revenue for cruise companies. Similarly, hotel
companies also suffer the same fate since fewer people go travelling.
Overall, we can predict that the price of stocks in travel-related industries will decrease and
investors will short sell the equities in the tourism industry.

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Asia-Pacific Regional Economic Overview

This crisis has an unprecedented impact on global capital markets. This section is to briefly outline
and take a bigger picture look at the affect it has had on the Asia-pacific region.
With huge uncertainties across the board about 2020 growth prospects and even more so for the
2021 outlook, the impact on the region’s markets will be deep and severe. According to the IMF,
growth in Asia is estimated to stall at 0% - the worst growth performance in 60 years which includes
the Great Recession and the Asian Financial Crisis.
Downward GDP growth rate is already seen in the region, ranging from the 3.5% decrease in South
Korea to over 9% in Thailand, Australia and New Zealand. The reasons for the variance in the
decrease varies from country to country, but the major trend that can be regressed is the degree of
control of the spread of the virus, the tourism sector slowdown, and lower commodity prices. Within
the region, Pacific Islands as well as developing economies such as Cambodia and Myanmar are
amongst the most vulnerable and worrying given the limited fiscal space and comparatively
underdeveloped healthcare infrastructure.
In addition to the impact from measures such as social distancing slowing down the economy, there
are two additional key factors.

 The Global Slowdown. The contraction of the global economy is forecasted to contract by
upwards of 3%, the largest contraction since the Great Depression. This simultaneous
shutdown will hit Asia as its largest trading partners are facing their own local economic
turmoil.
 The China Slowdown. China’s growth is projected to slowdown from 6.1% in 2019 to 1.2%
in 2020. This is a sharp contrast against the duration of the Great Recession when China’s
growth was relatively unaffected due to its fiscal stimulus of approximately 8% of the national
GDP. A stimulus of this magnitude cannot be expected this time and therefore, China will
not be able to contribute to soften the affects felt across Asia.
Asian economies have taken initiatives in the direction of supporting and direct fiscal stimulus
packages. Governments of the region are each prioritizing to maintain and support or even expand
their healthcare sector and for some countries with insufficient budgets, this may mean a reduction
in government expenditure on other sectors. Central banks are using monetary policy to provide
the necessary liquidity needed to ease the financial stress of industries and SMEs, cutting of
interest rates (as seen here in Myanmar), quantitative easing through open-market operations, and
some have taken to the easing of macroprudential regulations for the time being.
However, additional action may be needed for emerging economies that have limited capacity for
increased spending within their budgets. These economies can be classified as those with tight
budget constraints and non-internationalized currencies. Central banks of these economies are
buying up local government bonds in the primary financial market to provide the lifeline of liquidity to
financial institutions, which in turn will support the individuals to smaller firms, avoiding high growth
rate in unemployment and credit defaults.

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Asia-Pacific Region Market Overview
Asian equites are all soaked in a sea of red across the board, hammered by one fear following
another, most of these markets could be said to have entered into a bear market or are on the
threshold of an entrance into one. COVID-19, a yet still uncertain oil price dilemma and
exceptionally low interest rates are escalating fears not only for a recession but a deep depression.
Still, there are differences across the region, with Mainland-China, New Zealand, Hong Kong SAR,
and Taiwan markets outperforming not only the regional but the global market. This summary is to
analyse the reasons why this is so. The following chart shows the performance of Asia Equity
Indices from their respective peaks in percentage.

With the current conditions what can only be called a ‘Trilemma’, the sectors most hardly hit, and
are expected to face more downside, are energy, financials, consumer discretionary, industrial and
materials. Consumer staples, real estate and information technology sectors should be less
affected given their relatively inelasticity based on essential sales and the optimistic outlook on 5G
related demand. Healthcare, utilities, and communication sectors are expected to be the most
resilient to the current volatility.
Taiwan and New Zealand are among the least negatively affected by the market conditions directly
due to proactive fiscal policies to provide liquidity and a low exposure to oil prices in benchmark
indices. Even though the recent turbulence has dragged down Taiwan’s index (TWSE), its 51%
market capitalisation of information technology-related public companies have proven to be
relatively stable and robust. New Zealand’s index (NZX) is dominated by public companies in the
most resilient sectors of healthcare, utilities, and communication and to a smaller extent, consumer
staples; limiting the exposure of the market risk to the current conditions, implying a lower sensitivity
to ultra-low national interest rates.
Thailand is one of the worst-off countries in the region in terms of market index performance given
its exposure to oil and tourism-related industries. Thailand’s index (SET) has taken a nosedive into
bearish territory to the point of triggering a circuit-breaker twice. From a bullish point of view, it can
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be said that some stocks have been over-sold and trading below its fundamental value and can be
expected to bounce back once this has been realized by the market.

Australia and Indonesia, as one might not expect due to their cultural differences, have a similar
basis in the reasons their market index has taken a particularly hard blow. This is namely their large
market capitalization in energy-related, and financial stocks, amplified by tumultuous commodity
prices.
Japan and Korea were expected to not be as negatively affected by many different analysts through
examination of their sectoral composition of their respective market indexes, NIKKEI and KOSPI, as
well as being oil importers by nature. However, the initial rapid growth of transmitted cases and a
rational fear of a second wave of cases has slowed down and is still threatening growth of public
companies and will make for a dire earnings report.
China is the black swan in this report. Equities in China seem to have been insulated from the rest
of the world. Apart from the positive official news on the control of the virus spread, recent data and
earnings reports have been disappointing to say the least making it very unclear of why the market
has been very resilient. A possible explanation of the incredibly low downside of the Shenzhen
index (SZSE) is due to its large sectoral composition in health care and information technology.
However, an explanation for the outperformance of the Shanghai index (SSE) is still yet to be clear.
Hong Kong SAR has been shielded from the worst due to its strongest correlation with Chinese
equities compared to any other region.
The main takeaway from this overview is that the riskiest equities are those in the financial sector
due to low rates, energy due to low oil prices, and consumer discretionary, materials, and industrial
sectors due to the coronavirus outbreak. Information technology, consumer staples and real estate
sectors should remain neutral with communication services, healthcare and utilities being the most
resilient equity sectors for the time being.

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Asia-Pacific Region Fixed-Income Market Overview
Yields on sovereign bonds across most major Asian economies will decline further over the coming
year, after already being dragged down by emergency interest rate cuts by central banks to
counteract the coronavirus impact as well as stimulating the economy using monetary policy
measures.
While central banks’ rate cuts pushed yields on most major Asian bond markets to historic lows
earlier in April, over the first week of May traders have poured in sovereign debt for cash, pushing
up the bond prices again. This volatility is to be expected in the turmoil that is the 2020 capital
markets. Nevertheless, recent polls conducted by various financial institutions have indicated that
this trend will not last. This is just an automatic reaction to the massive fiscal stimulus bill that has
been introduced in the past few weeks and more expected in the coming quarter.
Considerable market premiums will be added to Asian bonds once the acute phase of this
pandemic-induced asset sell-off is over and bond yields will be reduced again, increasing the credit
spread once again.

Indonesia 10-year bonds yields are forecasted by multiple analysts across the globe to fall by
approximately 160 basis points to 6.76% in a year’s time according to the median forecast from the
current 8.32% yield. With the growth rate of China’s GDP slashed, the 10-year RMB denominated
bond yield is forecasted to tumble by over 50 basis points over a single fiscal quarter.

Local currency bonds outstanding in emerging East Asia totalled $16 trillion at the end of December
2019, up 2.4% from September 2019 and 12.5% higher than December 2018. Bond issuance in the
region, meanwhile, totalled $1.44 trillion in the fourth quarter of 2019, a 9.5% decline from
September last year. The local currency bond markets of the Republic of Korea and Malaysia had
the highest bonds outstanding-to-gross domestic product ratios in the region, at 130.5% and
104.6%, respectively.

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Moody’s, S&P and other rating agencies have downgraded the bonds of the governments of many
Asian economies, including but not limited to China, India, South Korea, Indonesia, Thailand,
Malaysia and Singapore.
Asian bond markets are in stuck in limbo as more and more unprecedented measures and policies
are being unleashed. On the one hand, monetary policies should lower bond yields, but
expansionary fiscal policies could steepen the yield curve.

Despite all these measures taking place, local currencies are forecasted to see further depreciation.
This is directly because of the virus, pointing out the weakness and vulnerability of the currencies
very clearly in the short-term. This includes the Japanese Yen, once thought to be the safe haven
of Asian currencies, shaken to its core after the it has come under direct pressure of being near the
epicentre of the outbreak in Asia.
Corporate bond yields will vary from sector to sector as a direct result of the risk of commodity
prices, with oil prices in the negative, the threat of a secondary wave of viral infections and the low
interest rates which may limit the ability of central banks to cut rates further. However, long-term
value investors that are willing to see past the current volatility of the markets may increase their hot
money flows into high-yield corporate bonds.
All that we can say at this current point in time is that it is too early to accurately forecast what will
happen to Asian fixed-income markets.

Myanmar Economic Overview

Myanmar has seen a relatively modest number of cases of COVID-19 patients, with the latest
number of total cases at 176.  On the 28th of April 2020, the government of Myanmar released its
Economic Relief Plan containing a suite of measures to soften the impact the pandemic will have on
individuals, households, and firms.  This 15-page document is packed with 7 goals, 10 strategies,
36 action plans and 76 actions to respond against the economic slowdown caused by the virus. 
This includes a cutting of interest rates twice by the Central Bank of Myanmar (CBM).  An
expansion of the K100 billion loan fund started in March to at least K200 billion up to K500 billion
will provide the much-needed fiscal stimulus and liquidity to jumpstart the economy once again.

Before the COVID-19 pandemic, the economic growth in Myanmar was forecasted to have an
increase to 6.7 percent in 2021/22 based on the 6.3% in 2019/20 and 6.4% in 2020/21.
Nonetheless, economic growth seems to have a sharp decline in 2019/20 of 2.0 to 3.0 percent
because of the direct and indirect impacts.  

With travel and border restrictions in place,  the impact will be felt in Myanmar’s tourism-related
sectors, agricultural exports to China, and in supply-chain disruptions to the manufacturing sector,
particularly the garment industry, which has accounted for 13% of total exports by value. 

The agriculture sector is the largest employer in Myanmar, accounting for as high as 78% of the
rural workforce while tourism-related industries employ 27% of the urban workforce.  There will be
massive layoffs and unemployment should be expected to climb drastically.  The Myanmar Tourism
Federation has expected revenues of tourism-related industries to fall by 50% in this year alone.  It
will take approximately 6-months to a year for this industry to recover.  

The World Bank analysis has suggested that layoffs in the garment manufacturing sector, which
employs 500,000 people, could negatively impact household incomes and domestic remittances,
especially if China’s supply chains continue to see disruptions.  

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Myanmar’s persistent upwards inflationary pressure and potentially higher food and consumer
staple prices will hurt the poor the most, further increasing the Gini coefficient of the country.  The
inflation rate has increased by approximately 50 basis points in the 4 months since the start of this
year of 2020.  

Myanmar Fixed-Income Market Overview

The most note-worthy event in the current pandemic situation is the expansionary monetary policy
utilised by the Central Bank of Myanmar (CBM) in the form of multiple interest cuts for a total of 150
basis points to stimulate economic activity during the crisis.  The immediate and the ripple effect this
measure will have on the fixed-income market of Myanmar is still yet to be seen.  We expect a
flattening, or in the worst case scenario, an inversion, of the yield curve in the weeks and months to
come as this slowly starts to impact financial institutions, the largest private holder of CBM treasury
bills and bonds.

The most recent CBM T-bill auction was held on 22nd April 2020 including 3-month, 6-month, and
12-month T-bills.  The face value of this offer was at K600,000 million.  The yields of these T-bills
were 7.894, 8.481, and 9.230 in % per annum, respectively.  Just 6 days later, a CBM T-bond
auction was announced and held on the same day, 28th April 2020.  This auction included 2-year
and 5-year T-bonds, with the face value of the offer at K500,000 million.  The yields of these T-
bonds were 9.618, and 9.954 in % per annum, respectively.  

These two auctions could be seen as a measure to reduce liquidity in banks as the main buyer of
both were by large financial institutions.  Should the CBM enforce the liquidity ratio of the banks to
remain constant throughout the crisis, this should bring down the total loans the financial institutions
will be able to provide.  According to our analyses, with the uncertainty of the markets in
unprecedented levels and volatility indices at an all-time high, banks may choose to lend to non-
creditworthy borrowers in the pursuit of profits.  This could lead to defaults which could lead to a
liquidity squeeze in the economy.  To summarise, CBM T-bills and T-bonds auctions could be
measures to prevent this scenario.

A CBM 10-year bond auction was announced earlier in the year but has been postponed due to the
coronavirus crisis until further notice.  This auction, should it occur soon, will further solidify the
CBM’s influence over financial institutions.

The conclusion we have arrived at for Myanmar’s fixed-income markets is that there is neither
enough fiscal space nor adequate historical data to predict the effects.  The CBM is in a delicate
balance of providing enough liquidity through quantitative easing and open-market operations while
preventing banks from taking unnecessary risks that could lead to a liquidity squeeze.

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 CBM Security Yields
12

10
Yield (% per annum)
8

0
3-month T-bill 6-month T-bill 12-month T-bill 2-year T-bond 5-year T-bond

Secuirty Type

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