The U.S. risks losing $4 trillion in corporate revenue on the back of the novel coronavirus without “meaningful fiscal or monetary intervention,” according to the world’s biggest hedge fund.
The loss would shrink the economy by more than 6%, executives at Bridgewater Associates wrote in a report Thursday. “We see the most extreme decline occurring in the second quarter, where we expect the level of activity to be more than 10% below 2019 end-of-year levels,” they wrote.
The virus pandemic and measures taken to stop the spread have wreaked havoc on global markets in recent weeks, driving the worst rout since the financial crisis. Governments and central banks across the world have stepped up efforts to counter the economic shock. On Friday, President Donald Trump said he would keep pushing for more federal spending until the economy recovers from the outbreak.
Bridgewater, founded by billionaire Ray Dalio, has been among the worst hit hedge funds, with losses of as much as 21% this year across the firm’s strategies.
Companies will have a cash flow gap of $2 trillion, mostly concentrated in the energy, travel and leisure industries, according to Bridgewater estimates. That will prompt companies to draw on credit lines, the firm said. If policymakers don’t help cover the shortfall, companies are likely to cut capital expenditures by about $900 billion and spending on buybacks and merger transactions by $600 billion as well as make staff cuts.
Wall Street Agrees the World Is in Recession, Disagrees on Depth
“Some companies won’t make it and will default,” the executives wrote in the report. “This isn’t likely to be a debilitating problem for the financial system or even the banks, given a large capital cushion and plenty of liquidity, but it will put further strains on the financial sector to tighten standards and pull back.”
Credit markets are pricing in losses of about $850 billion in U.S. corporate debt and leveraged loans, Bridgewater said. That’s a smaller loss than during the financial crisis, but will still result in lenders pulling back, the firm said.
— With assistance by Katherine Burton
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