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A worker in a face mask takes orders from motorists in the drive-through lane at a burger restaurant on July 1 in Los Angeles, California. California governor Gavin Newsom has ordered indoor dining restaurants to close again for at least three weeks amid a surge in new coronavirus cases. Photo: AFP
Opinion
Kerry Craig
Kerry Craig

Economies revving up recovery from coronavirus should expect many detours

  • Governments and central banks’ commitment to nurse the global economy back to health is reassuring, but the virus won’t be so quickly tamed
  • Sectors which can operate with some social distancing policies are likely to do better than industries heavily reliant on the free flow of people
Kerry Craig
Kerry Craig
Why you can trust SCMP

A new economic and market cycle has begun as the world tries to rebound from the short-lived but brutal Covid-19 recession. However, this is no ordinary recovery.

Pent-up demand and a desire for expansion are at odds with the scary possibility of a virus resurgence, something we are sadly seeing in the US as cases there spike in many states. That makes for wildly disparate predictions for a post-coronavirus world.
To gain some clarity on what lies ahead, we can start by assessing the roller-coaster journey of the first half of the year. Clearly no one could have predicted that the global economy would have been brought to a virtual standstill by a global pandemic, or even that we would so quickly be back to where we are now in terms of global markets and investor sentiment.
The swings in economic data over the past few months have created some remarkable statistics. For example, the US unemployment rate went from a 51-year low (3.5 per cent) in February to a 72-year high (14.7 per cent) just two months later. Even more astounding is that as the unemployment rate surged to multi-decade highs, the US S&P 500 market returned 20 per cent in the second quarter and climbed back to over 3,000 points.

Global policymakers rode to a quick and concerted rescue with virtually endless support measures, creating a more resilient market by absorbing and cushioning economic loss. The commitment from governments and central banks should not be underestimated and they clearly stand ready to do more if required.

This should be a positive for both the economic recovery in the second half of the year and for the performance of equities and high-yield bonds.

Central banks doing whatever it takes to lubricate markets and keep money moving freely initially justified much of the stock market bounce following the initial plunge. But the optimism-driven surge in US equities that eliminated most of the prior losses, by some measures driving stocks to record highs, feels distinctly less sensible. Markets may be getting ahead of themselves and pricing in too much good news.

Don’t knock stock market bulls who are upbeat about economic recovery

As the economic and fiscal costs of virus containment have become clear, restrictions on social interactions have been eased faster than is prudent – from a basic public health perspective – in some places. This is playing out in the US as the daily count of new Covid-19 cases steadily rises in several southern and southwestern states.

Due in part to how politicised the virus outbreak has become in the US, as well as to the economic cost of such measures, an outright nationwide shutdown seems unlikely. That effectively leaves municipalities and states to their own devices to coordinate localised responses.

In the meantime, and in the absence of a nationally coordinated strategy, the path of the virus may well undercut US consumer spending and confidence to some extent, as many Americans stay at home even without official lockdown policies.

02:03

Business still terrible in Wuhan, despite end of lockdown at China’s first coronavirus epicentre

Business still terrible in Wuhan, despite end of lockdown at China’s first coronavirus epicentre

The US experience highlights the relative ease in switching an economy off and the enormous difficulty in restarting it. Recovery will be halting, gradual and patchy, with a few stop-starts along the way.

The potential for a few economic stumbles combined with a resurgent equity market means that the rotations within markets will become more important and nuanced than the outright direction. In the absence of a vaccine on the immediate horizon, the world is going to see partial, staggered reopenings as the virus battle continues.

Therefore, sectors which can operate with some social distancing policies and will benefit from increased levels of consumer activity are likely to include certain retail or financial industries. Industries heavily reliant on the free flow of people will continue to struggle as solvency concerns rise.

Although the virus remains a wild card, more certainty around the earnings outlook over the coming 12 months should become apparent. That will make valuation metrics such as forward price-to-earnings ratios start to look more reasonable.

Kerry Craig is a global market strategist at JP Morgan Asset Management

This article appeared in the South China Morning Post print edition as: Economies recovering from outbreak should expect detours
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