[Opinion] Preparing for the Post-COVID-19 Era

Nogeun Chang, Head of Research Center at Hyundai Motor Securities

Recently, the value of all assets except the US dollar has plummeted in the financial market. Investors, engulfed in fear as if they were people in urgent need of cash, have massively sold off even gold and US Treasury bonds, which are considered safe assets. The preference for only the US dollar, the key currency, is something the United States absolutely does not want, as it implies that the entire global financial and asset system could be damaged. Reflecting this, the US Federal Reserve (Fed) cut interest rates by 150 basis points (1bp equals 0.01%), implemented quantitative easing, and even conducted currency swaps. Despite currency swaps, quantitative easing, and interest rate cuts, the dollar depreciation that the US desires has not materialized easily. It seems more time is needed for the fear among market participants, who had focused on leveraging through low interest rates, to ease.

Although the economic recession caused by the novel coronavirus infection (COVID-19) may not be as severe as the 2008 financial crisis or the 2011 European debt crisis, the trauma from past crashes is amplifying the fear. The 2008 financial crisis was a systemic collapse severe enough to bankrupt several investment banks, and the 2011 European debt crisis was a major fear that some Eurozone (19 countries using the euro) nations might default. Especially during the 2008 financial crisis, there was significant market anxiety about the quantitative easing conducted by the Fed. However, low interest rate policies, quantitative easing, and global cooperation eventually patched up and stabilized the problems. Eleven years have passed since the market stabilized in 2009, and the entrenched low interest rates have produced many marginal companies with new underlying illnesses. Negative bond yields in the Eurozone have extended into the corporate bond market. Currently, 11.5% of Eurozone corporate bonds have negative yields. The meaning of negative yields reflects the expectation that investing in safe bonds, even paying storage costs, is preferable to the risks arising from long-term management.

Low interest rates have produced the side effect of prolonging the survival of marginal companies. There are concerns that if marginal companies go bankrupt en masse due to the recession triggered by COVID-19, financial institutions might also collapse. However, the exposure of major countries’ banks to marginal companies likely to go bankrupt in this economic slowdown appears to be quite limited. Since the 2008 financial crisis, major banks have continuously undergone stress tests, and the proportion of complex overlapping derivatives has significantly decreased compared to the financial crisis.

COVID-19 is expected to significantly change human life in some form going forward. In the short term, it is expected to induce the bankruptcy of marginal companies dependent on low interest rates, and the financial market is anticipated to stabilize within six months through interest rate cuts, quantitative easing, qualitative easing, and helicopter money. However, in the long term, industrial and social changes are expected to proceed more significantly than anticipated. The current trends of openness and globalization are likely to contract, and state control is expected to strengthen around certain countries. The sharing economy, which had been in the spotlight, is expected to retreat somewhat. Demand for telecommuting, remote medical care, and social surveillance will globally expand the demand for cloud infrastructure, virtual reality (VR), and augmented reality (AR). Along with increased untact (contactless) demand, unmanned operations, unmanned delivery, and biometric technologies such as facial recognition and temperature recognition are expected to spread throughout society. Companies will revise their production methods that heavily rely on specific regions despite increased costs, and the risk of densely populated metropolitan housing will highlight the possibility of easing metropolitan centralization. In conclusion, it is clear that COVID-19 will serve as a turning point that shrinks the old economy while transforming society and industry around the new economy.

No Geun-chang, Head of Research Center, Hyundai Motor Securities

This content was produced with the assistance of AI translation services.