Insights for professional partners

The global economy is waking up from its medically induced coma as lockdown measures to combat the spread of COVID-19 are eased. With high levels of unemployment, ongoing social distancing measures and the risk of a second wave, what will economic activity look like over the coming months?

Markets have rallied strongly as investors look forward to better days ahead. It’s often difficult to work out what’s happening in the middle of a crisis, and we don’t know what will return to normal and what will have changed forever.

Markets have reacted to the collapse in demand that will be wrought across many sectors by attempts to contain the coronavirus outbreak, as conferences, business travel and holidays are cancelled and consumers are encouraged to stay indoors.

The longer the crisis lasts, the greater the risk that companies will face severe cash flow problems. When the economic tide is turning, as it is now, any shortcomings of business models are left exposed. As Warren Buffett famously said: “It’s only when the tide goes out that you learn who’s been swimming naked.”

How low can yields go?

Trade wars continue to cloud the outlook for businesses and consumers. Closer to home, Brexit uncertainty has gone from bad to worse. Our new Prime Minister Boris Johnson’s first few weeks in office have been pretty spectacular.

We’re spending more time than ever before shopping through our smartphones and laptops rather than braving multi-storey car parks and crowded high streets. 

A broader swathe of economic indicators — of the recent past, present and future — have fallen to indisputably weaker levels than at any time since the 2008 global financial crisis. That means we have more reasons than at any time over the past decade to be worried about the outlook for the US and global economies over the next 12 months.

When the pace of economic growth begins to slow and the outlook becomes more gloomy, it makes sense for investors to start shifting their equity investments away from cyclical sectors and towards defensive ones, even if you don’t think a recession is necessarily likely to ensue.

While the Brexit deadline draws closer, the route to a deal between the UK and the European Union (EU) shows no signs of materialising.