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May 13, 2020
  • Four factors will dictate the speed and shape of recovery: virus transmission, damage to the financial sector, the behavioral response by consumers, and the policy response by lawmakers.
  • Speculation about oil storage capacity in Asia is easing the current bottleneck, but oil production cuts are not scheduled to take place before the beginning of June — until then, there continues to be huge supply and subdued demand.
  • Recoveries from previous recessions will help benchmark the progress on this one; in the U.S., output took anywhere from 5 to 25 quarters to return to previous peaks and unemployment took 4 to 8 years to reach previous lows

Recent history tells us recession recoveries can be V-, U- or L-shaped. This shorthand is tied to how long it takes for economic output to return to its previous trend. A V-shaped recovery, the most optimistic, suggests a bounce-back within six quarters. The U-shaped and L-shaped recoveries stretch to five years or more. Increasingly, the coronavirus pandemic recovery looks to be a U- or L-shape.

There are enough unknowns and rapid changes that macroeconomic indicators, particularly those relying on the past month’s data, are becoming less useful. Instead, we are looking at four factors that will determine the shape and speed of the global economic recovery and identifying knowns within them. Two factors are coming into sharper focus: whether the damage to the financial sector is shouldered through household debt or corporate debt, and the behavioral response by consumers.

We can look to the global financial crisis and subsequent Great Recession to understand the basic principles at play: the 2008-2009 private sector bailouts in the U.S. and U.K. were not always popular, but they did produce a faster recovery. Having the private sector shoulder responsibility for cleaning up its balance sheets extended the time needed to reach pre-crisis activity levels. The bailouts also prevented bankruptcies, which would have had a ripple effect on employment and consumer spending.

Even though the pandemic is not an identical situation to the Great Recession, the same principles about the recovery timeline hold true. Since household debt was relatively modest before COVID-19, savings rates will remain elevated until consumers digest the full range of corporate and government responses and feel comfortable spending again.

Tensions between the U.S. and China were on the rise prior to COVID-19, thanks to the ongoing trade war between the two nations. Now that the U.S. and China are in a war of words over the origins of the coronavirus, macroeconomic data on equity returns reflects the enhanced caution many investors are embracing.

Private equity fire sales

While some private equity funds are snatching up pieces of distressed companies in the down market, many investors are keeping their options open as the market remains volatile, resulting in deal delays and outright terminations. Abu Dhabi Investment Authority, the $580 billion sovereign wealth fund, is delaying the sale of $2 billion in private equity fund stakes. Elsewhere in Asia, Blackstone’s $4 billion deal to acquire Chinese office property developer SohoChina has stalled.

Swiss stability

As one of the major currencies in the world, the Swiss franc is highly traded and also seen as a currency safe haven during a crisis. The Swiss National Bank announced its intervention into the foreign exchange markets in March with the aim of weakening the Swiss Franc against the Euro in particular; recent weekly data on sight deposits indicate heightened intervention volume. In contrast, the U.S. dollar is facing some modest headwinds.

  • 2020 earnings estimates are now expected to decline by more than 15% in the U.S. and Europe; unemployment numbers in the affected countries, as well as the speed with which relief funds reach businesses and consumers, will further influence those estimates.
  • As countries begin to come out of lockdown, their stocks will tell a more complete story. In April, for instance, U.S. and Asian stocks outperformed amid steps taken to reopen.
  • Fixed income generated positive returns in April, but the year-to-date numbers remain negative for most bond markets. If the positive streak continues in May, further out from the initial flurry of monetary policy changes, the 2020 outlook becomes more positive overall.

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