Activity standstill

The coronavirus shock is sharper than what we saw in 2008 – but we believe its cumulative hit to growth over time is likely to be lower. The main risk to our view: policy needed to bridge businesses and households through the shock is not delivered in a successful and timely fashion, causing lasting economic damage.

Implication: We are mostly sticking to benchmark holdings on an asset class level; prefer credit over equities; and favor rebalancing into the risk asset decline.

Economic freeze
Composite PMIs of developed and emerging markets, 2006-2020

• Record plunges in economic activity data – US retail sales, initial unemployment claims and global manufacturing output being the latest – are confirming the unprecedented contraction in economic activity. See the chart above.
• The rate of growth in virus cases looks to be slowing in many regions as stringent shutdown measures take effect. A key question: whether such measures can be lifted without a major second wave of cases.
• The U.S. will likely prove more resilient because of a smaller share of manufacturing in its GDP, a relatively high share of healthcare spending and an aggressive policy response.
• The nature of the rebound will depend on the path of the outbreak, effective delivery of policy response and potential changes to consumer and corporate behaviors.

Bottom line: We see this shock as a temporary one and do not expect a repeat of the “lost decade” following the global financial crisis, but timely implementation of policy stimulus is critical.