The COVID-19 pandemic and associated lockdowns are causing what will likely be the deepest recession since the Great Depression. Still, this recession will probably also be one of the shortest in history, due to the extraordinarily fast and powerful policy response in the US and globally.
The Fed has gone from monetary policy to outright credit policy, touching many areas of credit flow into the economy and introducing facilities well beyond those in 2008. Globally, the speed and scale of fiscal stimulus has dwarfed that provided during 2008/2009. And unlike the period following the financial crisis, we do not expect fiscal retrenchment given the populist pressures facing many governments.
Deeper contraction but faster recovery
When the world was heading into the Global Financial Crisis in 2007, households and financial institutions were extremely overlevered. And after the financial crisis, they had an ongoing need to de-lever, which slowed the recovery. The COVID-19 recession has been a much deeper initial shock than in 2008, but overall imbalances heading into the crisis were much lower than prior to the GFC. This time it’s more of an income shock than a balance sheet recession and there is less retrenchment to do, which means we should have a healthier recovery as the economy reopens.
There is, however, a lot of uncertainty around when and how we reopen economies, and there are clearly big differences across countries. Other questions are whether and when consumers and businesses will feel psychologically safe enough to return to semi-normal activities, and when they do so can we successfully contain renewed outbreaks of the disease.
Our base case for economic reopening
To genuinely reopen, economies will likely require widely available testing — of the virus and also of the antibodies to see if individuals are immune. Countries may also need contact tracing and surveillance systems so that new waves can be identified quickly. We suspect such capabilities will take at least another month in the US and many other developed economies. We expect to see a gradual, staggered reopening of different areas of the economy over the course of late spring and summer.
A big question is whether we experience second waves of infections, which we’ve seen happen as some Asian countries, Singapore for example, try to reopen. It seems likely that we will have various waves of the virus which may lead to a start/stop period reopening. Reopening is not a linear process. Antivirals like Remdesivir may help reduce the risk of dying from the disease but they are not preventative. Public health officials expect it will take at least another year for a vaccine to become widely available, which is what is needed for full normalization of economic activity. We will continue to need aggressive government support to provide a bridge in the meantime.
Asset allocation during the pandemic
As we look at how to think about asset allocation between countries, we’ve collected data on various countries’ relative resilience and vulnerability amid the COVID-19 pandemic.
We have looked at demographics, medical capacity, sensitivity to global trade, governance, fiscal response, and lockdown effectiveness. In developed markets, Germany and Switzerland are near the top of the list. Spain, Italy and Sweden show the greatest vulnerability. In emerging markets (EM), north Asia is most resilient, including South Korea, Taiwan, and China, while South Africa and Turkey are most vulnerable.
Trades for the current environment
Given this framework, we prefer to overweight Korea, Hong Kong and China equities vs. other EM. We take a similar approach in fixed income, where we find Asian high yield attractive relative to other emerging market debt. In currencies, we are long the safe haven JPY vs. USD given the still shaky global growth environment. And given extremely accommodative monetary policy and widening budget deficits, we have an overweight to gold.
Here you’ll find the full report: ‘Seizing opportunities in the current market environment’ from UBS Asset Management.