Are we looking at a V, U or L?
Written and accurate as at: Apr 08, 2020 Current Stats & Facts
There are as many questions as answers emerging and despite a proliferation of new COVID experts (perhaps the fastest growing new industry), there are still many clouds on the horizon.
The bulls supporting a 'V' shaped recovery point to China, South Korea and Taiwan as examples of where infection rates peaked fairly quickly, and life can return to normal sooner than expected. Equity markets are always looking forward to try and price future profits and forget history quickly. The equity market would want nothing more than to embrace this bull case. Since the equity market tends to look forward about 3-12 months (hence why equities often turn down in the months ahead of a recession) then this scenario may have already played out.
However, there are several complexities that the bulls haven’t considered. Infection rates in the world’s biggest economy (and market) are yet to peak, which seems to have been an important pivot point for markets. The University of Washington has projected that over 80,000 people may die in the US, but the range of estimates is 41,000 through to 177,000 with deaths peaking on 16 April – still some time away. Much depends on state government responses to the pandemic. It’s hard to see markets putting this crisis behind them until they can be sure that the worst scenario doesn’t play out. Then there’s the emerging world, where the coronavirus has barely begun spreading.
Lastly, what if it comes back? Comparisons have been made to the Spanish flu, but there has been less emphasis on the fact that the Spanish flu came in three waves: the spring of 1918, then the autumn of 1918 and finally the winter of 1919. Schools and other venues were closed, re-opened and closed again before daily life returned to normal. Australia has the added complexity of heading into winter.
For us it is way too early to be confident that new shocks will not present themselves in the months ahead, with no credible estimate of a vaccine sooner than a year from now. Even the worst economies always bounce back eventually, so talk of an 'L' shaped recovery is for extremists only, but the possibility of a long 'U' shape recovery looms large, despite all the money thrown at the problem, particularly as Australia faces its first recession in 29 years. We will clearly need to account for the second round of further economic contagion and the psychological effect all this will have on the leveraged Australian consumer emerging from shutdown later this year.
For this reason, we continue to comb through our portfolios to ensure the fund managers, and the underlying companies, have the resources to “hibernate” and endure the tough times to come, as well as looking for new, reasonably priced companies that should thrive once recovery starts to emerge.