Recession to recovery: Emerging trends and their implications

As we outlined in our Q2 Investment View, our baseline scenario of a painful but short global recession seems to be unfolding – given stronger macro data, the rebound in markets, and global earnings showing signs of bottoming. Most countries – i.e. the US, Europe, and Asia ex-Japan – should see a return to positive GDP growth by Q3.

The impact of the recession ending, and GDP increasing, has a very powerful effect – forward-looking markets are rallying on this and expect stronger earnings growth to come through. However, recoveries in economic activity, and unemployment, back to pre-COVID-19 levels will be much slower and likely take several years.

Lagging weak labour markets should not prove a significant headwind to global markets (just as we saw after the GFC 2008-09). What it will mean is that global central banks will be forced to keep interest rates very low for a prolonged period.

Key risks that we are concerned about over the next 1-3 years include:

• a resurgence in COVID-19 lockdowns;
• greater geopolitical risks;
• the prospect of an equity market bubble unfolding;
• and, at the other extreme – high unemployment could depress household spending for much longer than expected, and result in a weak earnings rebound that would disappoint markets (especially in the US).

A very painful, but relatively short global recession, has created buying opportunities. We remain sanguine about longer-term fundamentals and have become more positive on risk assets (especially global and Asian equities, led by China). Active management is still critical because there are key signposts investors need to watch closely as risk outcomes could be quite bipolar.