Capital markets holding up under the weight of COVID-19

COVID-19 RESOURCE HUB | Financier Worldwide

CAPITAL MARKETS

Capital markets have fared relatively well during the initial months of the COVID-19 crisis. According to a report from the Association for Financial Markets in Europe (AFME), European capital markets continued to hold up following the outbreak, with liquidity ranging from very good to mixed, depending on the sector. In fact, up to mid-April there were record volumes of new issuance in certain sectors.

While many of the efforts around COVID-19 in the first few months of the crisis have been focused on the public health crisis, ensuring that the virus does not create an enduring, damaging financial crisis must be another priority in the months ahead.

Amid significant market volatility, national governments have already taken several important steps. In addition to interest rate cuts, governments across the world have launched a range of diverse and creative stimulus packages to insulate economies and the wider financial system from the damage caused by the outbreak.

Capital markets also have a key role to play in helping to stabilise the economy. Going forward, it is vital that banks and investors provide funding and liquidity to ensure that credit markets continue to function.

There will be many challenges to overcome, particularly as governments run out of fiscal stimulus options, and the prospect of a deep and painful recession becomes reality. This will require banks and capital markets to be flexible, particularly as the global economy transitions away from a period of sustained growth and into a period of recession.

Capital markets may need to embrace change and look to other, perhaps less obvious areas for growth.

The social bond market, for example, offers a way of addressing socioeconomic issues that other capital market mechanisms do not. COVID-19 social bonds are generating significant investor interest, paving the way for more issuances in the future.

For example, since March, the World Bank’s International Finance Corporation (IFC) has raised $1bn from a social bond which will boost production of medical supplies in emerging markets. The IFC has also pledged $8bn to existing clients in sectors directly affected by the pandemic, including tourism and manufacturing.

Given that a number of governments have already lowered interest rates to near zero and issued massive stimulus packages, social bonds may assume even greater importance in the months ahead.

COVID-19 has been, and continues to be, a profound health and humanitarian crisis that will massively challenge the financial and operational resilience of global capital markets.

For many banks and financial institutions, their relative strength, compared with the 2008 financial crisis, will be an advantage going forward. Capital ratios prior to the outbreak of COVID-19 were the strongest going into this crisis than at any time in the last decade. However, while the crisis continues to unfold, it is imperative that financial institutions remain vigilant and re-examine their business continuity playbooks as circumstances change.

When the world and the global economy begins to emerge from the COVID-19 crisis, capital markets will be integral to ensuring that capital flows resume, and the global recovery can begin in earnest.

Richard Summerfield