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Next forum date: Monday 18 May 2020, 3:00pm BST
Headlines
- April was the cruellest month: globally, in terms of the impact on the macroeconomy, April probably saw the trough in activity — the steepest global recession in recorded economic history
- Q1 GDP first releases were generally not as bad as feared, but data only go up to March, and are likely to be revised down in subsequent releases
- May and June are unlikely to be much better than April but, in our central case at least, the worst is now behind us
- For that reason, we have changed the name of this note from Recession Watch to Recovery Watch — from now on we will be monitoring the strength of the recovery
- Restrictions on movement are starting to be eased in many countries as R falls decisively below 1 and trends down
- But beware of the second wave, already in evidence in China, South Korea and Germany
- Asset prices in the round are remarkably high, supported by policy
The trough of the global recession was probably reached in April, with GDP down some 10% in Q2 compared to 2019 Q4. The three scenarios V, U and L remain in play, with equal weights on V and L (45% each) while the intermediate U shape has the lowest weight. In our view, the U scenario is not stable: more likely it will morph into either a V (back to pre-crisis levels by the middle of 2021) or an L (where a growing financial crisis will keep growth lower for much longer).
Non-Datastream
The number of deaths attributed to COVID-19 per million of the population appears to be flattening in most countries (notwithstanding the different protocols across countries for counting those deaths) — Sweden and the US stand out as countries where the number of deaths is still growing unabated. In the US, there is wide variation across the individual states.
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Global interest in the virus as captured by the number of articles referring to it peaked at the end of March/beginning of April, and has fallen back since almost to where it was before the outbreak in Italy started to make the news in mid-February.
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The pressure on corporate margins has also come down from its peak during April, although it is too early to be sure that it will remain that way.
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Small firms are least able to absorb the impact of this shock, a fact that is reflected in their relative equity performance, down 20% since the start of the year compared to the 7% hit to large caps. Tech stocks have done better than average, with the Nasdaq now back at its pre-crisis level. This might be a reflection of a structural shift towards tech as a result of the pandemic, with working practices changing, perhaps permanently.
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The colossal amount of fiscal and monetary stimulus that has been put in place, and the further blurring of the lines between monetary and fiscal policy, have raised fears of inflation in some quarters — fears that Fathom, for the time being, does not share. Alternatives to fiat currencies including gold and Bitcoin are trading above their pre-crisis levels, but not far above for now. Concerns that this crisis will radically undermine the value of fiat currencies in the longer term are not yet priced in — correctly in Fathom’s view.
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Such optimism as there is about the shape of the global recovery is fragile and could easily be undermined by the emergence of a second wave of the disease. Unfortunately, there is already some evidence of that from China and South Korea. Watch this space.
Volatility in risk assets has increased. But the impact on asset prices has not been as large as the impact we expect on the real economy — at least not yet. The chart below shows our expectation for the values in Q2. The S&P here is a moving average of the ratio of the equity price to nominal US GDP, so even though equity prices have fallen, the fall in GDP that we expect means that they remain overvalued. The same applies to the Nasdaq. Government bonds are the inverse of the bond yield, and house prices are the house price-to-nominal GDP ratio across the major economies. All four of equities, tech stocks, government bonds and house prices are now in ‘bubble’ territory, around 2 standard deviations above their respective means. And that is despite the fact that the VIX (inverted on the chart below) is recording fear at the same level as during the Great Financial Crisis. The massive response of macroeconomic policy underpins this picture.
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Even when looked at in PE space (the chart below) the impact on equity prices has been fairly muted so far — again, this emphasises the speed and magnitude of the policy response to the crisis.
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