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A guiding principle in our analysis is that asset markets will react first and foremost to the peak in infection rates, with economic data the next to turn and employment data the last to follow.
Already, some recent data1 showed the global economy has entered a recession. As the pandemic prevails, the question has quickly shifted from whether there will be a global recession to how severe the recession will be. Will it be severe but short? Or severe and prolonged?
Global PMI for manufacturing and services1
Global real GDP growth1
The reopening of economies, and staying open, requires delivering on a range of measures. Investors could consider some potential outcomes on how this disease and the social distancing recession could play out in the months ahead.
Three case scenarios for the expected economic and asset market recovery:
Downside – a prolonged recession
Central – a gradual but accelerating recovery
Upside – quick recovery
Stylised quarterly profile for US activity data in each scenario
(4Q 2019 = 100)
Our central, upside and downside scenarios translate to different levels of gross domestic product (GDP) but a similar trajectory. In any event, US GDP dips into recession.
In our base case, we see a gradual but accelerating recovery starting in 3Q 2020.
In our upside case, this occurs more rapidly.
In our downside case, the virus lingers through the summer and delays a rebound until early 2021.
What are the asset allocation considerations3 under these different scenarios?
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Uncertainty over the economic impact of the pandemic will likely persist even as the infection curve is flattening in some locations. Whatever the eventual recovery scenario, the sharp rise in market volatility and the distortions created by central bank intervention are increasing the opportunities for skilled active managers to add value across equity, fixed income and multi-asset portfolios3.