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Our views 15 May 2020

The shape of things to come

Trevor Greetham, Head of Multi Asset

5 min read

Article first appeared in Citywire magazine, May 2020

Stock market crashes, and the sudden stops in the economy that trigger them, have a single, all too recognisable shape: the backslash (\). Recoveries, on the other hand, come in all shapes and sizes. 

There is human psychology at work. In the early stages of a crash investors assume recovery will be V-shaped, as usually it is after a minor economic interruption. As the sell-off gathers pace, they worry it will be U-shaped; a period of weakness before a delayed but equally full recovery. At the despondent market lows investors tend to give up altogether and the oxymoron of an L-shaped recovery comes to the fore.

There is no letter of the alphabet that properly captures what we’re likely to see as the Coronavirus lock down is gradually eased. The closest candidate in our minds is (bear with me) the square root symbol: an immediate strong pickup, as some parts of the economy switch back on, followed by a long flat period with activity stagnant and far below its pre-crash level.

Image is a visual representation of the square root symbol

After the initial re-opening we are still likely to have what will feel like a very nasty recession to contend with. Consumer spending is unlikely to return to previous levels while the risk of further waves of infection hang over us. Deflationary pressures will intensify as production recovers faster than demand. Meanwhile, unemployment is likely to remain stubbornly high as small businesses fold and sectors like air travel and hospitality struggle to recover at all. 

Massive stimulus has helped stocks to recover about half of their March losses but from these levels the outlook depends on the uncertain and slow path back to normality and we are taking a flexible approach. The early discovery of an effective treatment or a cure for Covid-19 could see the positive tone extend. However, just as likely, in our view, is a relapse towards the March lows as a second wave of infection takes hold and lockdown conditions are reluctantly re-imposed.

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations.