The world slowly recovering from the pendemic

Covid19 infection rate slowly decreasing

The global economy is waking up from its medically induced coma as lockdown measures to combat the spread of COVID-19 are eased. With high levels of unemployment, ongoing social distancing measures and the risk of a second wave, what will economic activity look like over the coming months?

What may seem surprising is that by the end of June global stock markets were almost back to the record highs seen at the beginning of 2020. In an environment of such uncertainty about the long-term economic effects of coronavirus, as well as risks posed by US—China trade tensions and the US presidential elections, are investors being overly optimistic?

It’s important to remember that equity markets typically anticipate turning points in the economy by three to six months. If this recession only lasts two months (March and April), then the recent moves in stock markets make sense. But we don’t know that for sure — there could be a second wave of COVID-19, or the economic healing process could be slow and stuttering.

We don’t think it’s likely to be as smooth as the equity markets seem to be anticipating. It’s important for investors to remain grounded by the probabilities — by what we don’t know — and we would put the chances of such a rapid ‘V-shaped’ recovery at 50:50. So we think it makes sense to protect portfolios against the risk of another leg down, even though it’s not a certainty.

Though new cases continue to decline in the developed world, they have started to rise exponentially in emerging countries (especially India and Brazil). Major economies are too globally integrated for a full recovery to occur without a meaningful abatement in the virus, and the restrictions to activity that it has brought on, across all countries.

Markets have also been supported by the extraordinary stimulus from central banks and governments, which has been impressive in its speed, scale and scope. This is important because the greatest historical failures to recover from a major economic shock were characterised by a lack of such action; for example in the Great Depression of the late 1920s and Japan’s prolonged deflationary bust that began in the early 1990s.

2020-10-24T23:20:14+00:00