WHILE the coronavirus pandemic is primarily a health crisis, it has also inflicted enormous economic damage across the globe.

It has been particularly damaging for specific sectors and industries which have experienced a sudden halt in activity, much worse than even the global financial crisis of 2008.

Although this economic crisis is, in some respects, more extreme than 2008, that crisis has given the world a number of valuable, belated gifts in dealing with this one.

The first is a reformed and healthy banking sector. Banks have built up their capital reserves and are in a much stronger position to deal with the fallout than they were over a decade ago.

Imagine the current crisis without those reforms – not only would we be experiencing a health and economic emergency, we would also undoubtedly be facing a banking crisis as well.

The second gift is a much more robust and comprehensive policy response.

Emboldened by the previous crisis, central banks have a much higher willingness to intervene in markets and the economy now via programmes such as quantitative easing (the process of buying government bonds to lower the cost of borrowing).

In addition, governments for their part have been much more active on the spending side this time around, with programmes such as the furlough scheme in the UK.

Risks lie ahead as the UK and other countries now move to more targeted responses to the economy.

The immediate response needed to be swift with the trade-off being that it was untargeted and catch all – in other words, central banks and governments could not allow perfection to be the enemy of the good.

The risk is that as we move into more targeted policies you leave some gaps unfilled, something financial markets will be watching closely over the coming months.

Over the medium term, what comes next will depend not only on our ability to deal with the virus, but how it affects the economy in more permanent ways and how policymakers respond.

Will some of our changes in behaviour become more long-lasting?

For example, working practices and the increase in working from home, or whether other recreational habits like eating out, going to the gym or the cinema are replaced by other activities that serve the same purpose. The greater the change in behaviour, the greater the long-term changes to our consumption habits and therefore more structural challenges facing governments.

Retraining is notoriously hard and many are concerned about how the Government will afford the required support.

On the plus side, the UK does possess one jewel in its crown, namely its own independent currency which gives it the ability to print money to pay back debt.

In this construct the greater constraint then becomes inflation. However, this is not an immediate concern because of the economic shock we are currently experiencing.

Longer term the inflation picture will depend to some extent on politics in the post-Covid world – i.e. will there be appetite for another slow and shallow recovery? We are monitoring this very closely.

From a financial market perspective, a long-term, diversified asset allocation is still our best answer.

Short-term uncertainty is high but, as always, we preach zooming out a bit and trusting financial markets over the long term, while targeting the greatest possible return for the level of risk clients can tolerate.

Therefore, we continue to focus on quality and liquidity for our clients’ assets, prioritising investments that have been able to weather the crisis.

However, clearly mitigating all risks is not desirable – there is no return without risk, especially now with interest rates at rock bottom.

Investors should therefore be strategic and think about acceptable levels of risk that can be tolerated, no matter how markets move in the short term.

Gordon Scott is head of UK regional offices at Julius Baer International