SYDNEY (BLOOMBERG) - The size of the fiscal response required to counter the economic impact of the coronavirus could be as much as an unprecedented 30 per cent of global output, according to one of Australia's top-performing fund managers.
The most likely outcome of efforts to contain the health emergency is a near total shutdown of the world's economy over the next two to six months, said Hamish Douglass, chairman and chief investment officer of Magellan Financial Group. This is likely to lead to a near total collapse in demand for many businesses over the period, he said in an investor update on the US$58 billion asset manager's website.
"We are unable to assess the most likely outcome at this stage, as we don't have visibility on the scale and effectiveness of the possible fiscal and monetary responses that governments and central banks might enact," Douglass said. "The fiscal response required to head off the worst outcomes is unprecedented and potentially could be up to 20 per cent to 30 per cent of GDP."
Thirty per cent of global gross domestic product would be about US$26 trillion (S$37.5 trillion), based on International Monetary Fund estimates for last year. That's bigger than the size of the US Treasury market, which was just under US$17 trillion at the end of February.
Governments around the world have so far pledged more than US$1.9 trillion in fiscal support.
Among the latest additions, US President Donald Trump signed a second relief package as Canada, Eastern Europe and Turkey bumped up stimulus.
Some governments have allocated new money for cash handouts and medical care, while several are planning targeted measures like tax breaks and loan support. Bank guarantees have started to take up an increasing share of the aid.
STRONG POSITION
Many countries, especially those in emerging markets, may be unable to respond with "sufficent force," Douglass wrote. But major countries including the US, China, Japan and Germany are in strong positions to respond, he said.
Magellan's flagship US$7.1 billion global equity fund has beaten 95 per cent of peers over the last three years, according to data compiled by Bloomberg. It's the fourth-largest investor in Starbucks Corp and among the 20 largest investors in Alibaba Group Holding, according to data compiled by Bloomberg.
Over the past week, Magellan has increased defensive holdings in its global equity portfolio and boosted cash to around 15 per cent from about 6 per cent, according to the update.
"We hope that politicians and central banks will act in time and with sufficient force to prevent a devastating economic collapse," Douglass said. "We are assessing their efforts as they announce them."
