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Coronavirus webinar: when will economic recovery come, and what will it look like?


Caspar Rock

Caspar Rock

Chief Investment Officer

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Kate Leppard

Kate Leppard

Head of Client Service, UK Wealth Management

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Keith Wade

Keith Wade

Chief Economist & Strategist

Schroders

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Financial markets remain highly volatile, with investors trying to gauge when a recovery might emerge. The timing and strength of the recovery is likely to be crucial in determining long-term effects of the virus on both economies and markets.

Global economy: what form will recovery take?

In this presentation Schroder's Chief Economist Keith Wade sets out the scale of the current slowdown, pointing out that "we would need to go back to the 1930s to see anything on the scale of current drops in economic activity".

He also sets out the range of monetary and fiscal measures being deployed by authorities around the world. "The aim is to keep businesses intact," he says, "so that when the restrictions are lifted we can get the recovery going again. We think of the policy response as a bridge to get households and businesses over the effects of the virus."

Schroders' main case, as shown in this graph, is that "we have a big fall-off with a strong rebound in 2021".

Contribution to global growth - by region

p5_worldGDP_w600px.png

Source: Schroders

The case represented in the chart is a "V"-shaped recovery, where the decline in activity is mirrored by the subsequent rebound.

But Keith says an alternative - and more painful - recovery scenario would see coronavirus lingering, causing parts of the global economy to recover more slowly and in phases.

"The concern is that we see a return of the virus," he says. "The UK may go through a series of cycles where restrctions are relaxed, only for a further shutdown to be introduced again if for example the virus returns in autumn."

This "coronvirus lingers" scenario would create a "W"-shaped recession.

The impact on stock markets and other financial markets

Caspar Rock sounds a warning about companies' future earnings, particularly in the latter scenario.

A slower, "W"-type recovery could have a more severe impact on future corporate profitability - making valuations, even at today's levels following recent weeks' share price declines, less attractive.

"Analysts have roughly downgraded earnings by 10% so far for 2020," he says. "We think there is room for further downgrades."

Caspar also discusses the outlook for dividends. This week has seen major UK banks canceling divident payments. The effect of this significant sector ceasing payments has been to depress the FTSE100's dividend yield from just above 6% to approximately 5%, he says, and he predicts "substantial dividend cutting over the next couple of years".

With Kate Leppard, Head of Client Service UK Wealth Management, Caspar and Keith go on to answer a range of investors' questions relating to the above topics and others, including the coronavirus's longer-term effect on the trade dispute existing between China and the US.

If you were unable to join this live webinar but would have liked to listen in and pose your own questions, more will be held in coming weeks. Please look out for invitations from your usual contact.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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