Low Possibilities around V-Shaped Recovery

Summary

• Number of cities are witnessing a spike in new cases, arising the need for an appropriate response from medical as well as government authorities.
• Countries are increasingly embracing softer restrictions, adding further risks of virus transmission, but early detection and containment of small hotspots would be favourable.
• Global landscape is undergoing a steady change. While prospects of a V-shaped recovery are receding gradually, some continue to express hope.

V-shaped recovery chances are receding as coronavirus cases continue to emerge from cities where the virus was once contained. Some countries are experiencing a second spike, raising concerns of the second outbreak of COVID-19. An outbreak will perhaps force policymakers to impose lockdowns, but selectively at places with a second wave.

In April, shutdowns were at the peak, globally, and countries were in a standstill. Intensity of collapse in the real economy was at peak across the globe, including rising unemployment, plunged production and damaged supply chains. During April, PMIs and other leading indicators nosedived drastically, and June quarter GDP print will have the results.

Since March, central banks as well as legislators have introduced large-scale policy support, with central bank initiatives including interest rate cuts and quantitative easing.

Pandemic continues to pose a risk as some countries are finding it difficult to contain the spread of virus and new cases continue to increase. But most of the countries have successfully remediated community transmissions, and people are coming back on roads as reopening continuous.

New Zealand has also reported new cases after tracing no new infections for some time. In Australia, new COVID-19 cases were traced in Victoria. Beijing and a few places in the US have reported an increase in new cases.

COVID-19 is here to stay

As it’s a virus, the chances of transmission continue to persist, and people have not denied prospects of a second wave of infections, perhaps the biggest tail risk. It is favourable for communities that COVID-19 infections, especially in the second wave, are traced and contained effectively.

Countries that are having initial spikes of second-wave must be more cautious and proactive in containing the virus. This pandemic has given long schedules to the world leaders, and complacent efforts by the leaders could well translate into disastrous outcomes, something which was felt in the first wave.

Related: Is Australia in a V-shaped Recovery Zooming from the expected ‘U’ Style: 10 things changing around us

In May, many countries across the world started to embrace softer restrictions, allowing global economy to function. Oil prices have returned to normal levels after a severe crash, indicating that demand is coming back online.

Leaders around the world were inclined to re-open the economy, as a shutdown economy implies an increasing intensity of a recession due to deteriorating fundamentals, rising unemployment, lack of demand, etc.

International travel restrictions continue to be in place, and it is likely that some countries may not open their borders by the end of this year. A medical breakthrough will continue to be a potential turning point in this crisis.

Additional information on medical breakthrough will continue to flow through the year, as firms complete and release human trials data of their vaccine candidates. A widely accessible vaccine will likely pave the way for global economy to transition into higher growth phase with no major uncertainties.

Largely denying the possibility of a V-shaped recovery, June Global Fund Manager survey by Bank of America indicated that investors believe stocks are overvalued by far. The survey broke the record when 78% of the respondents said equities are ‘overvalued’ – highest proportion since 1998.

Majority of the managers believe that we are in a bear market rally. A little less than one fifth of the respondents are hoping for V-shaped recovery, while most continue to pitch for W or U-shaped recovery.

But investors are more optimistic about the global economy; only 46% of respondents expect a recession next year in this edition of the survey that is down from 77% in May. They continue to weigh on a second wave of infection as the biggest tail risk.

Investors continue to prefer US tech and growth stocks that have remained a highly crowded trade, and they have covered the likened short positions in financials, emerging markets and small caps.

Geopolitical Uncertainties

Since countries asked for an independent enquiry into the origination of COVID-19, China has grown uneasy with the world; territorial disputes, Honk Kong escalation, growing trade tensions with Australia, especially because it led the demand for enquiry.

US and China have seen an impact on their trade talks due to coronavirus, and the phase one trade deal between the two countries continue to be in place. At the same time, US legislators have passed bills that irked China that were related to Hong Kong and Uyghurs Muslims.

Countries have been very inclined to undertake supply chain overhaul. Moreover, COVID-19 has accelerated many developments in the global landscape, including deglobalisation, and the much-awaited UK trade deal with Europe. In the US, people may elect a new President by the end of this year, which continue to remain a tail risk for the markets.