Outlook for 2020: life after lockdown

Posted by Liz Rees in Market commentaries category on 15 Apr 20

The damage caused by the spread of coronavirus (Covid-19) is huge, both in humanitarian and economic terms. The world faces a deep recession this year as global growth estimates have been cut.

Most forecasts factor in a short but deep recession, lasting 3-6 months, followed by a strong upturn driven by fiscal stimulus and pent-up demand. However, there is high degree of uncertainty about the speed of the recovery and forecasts at this stage should be taken with a pinch of salt.

Economic trends

The economic data makes fairly grim reading. The International Monetary Fund now forecasts a 3.0% contraction in global GDP1 for 2020, having previously expected 3.3% growth, with Western economies the worst affected. Many economists are even more pessimistic.

Huge job losses are inevitable, with 16.8m new jobless claimants in the US in just 3 weeks up to 4th April. Consumer confidence has plummeted and services PMIs2  across major economies recorded some of their biggest monthly falls on record. It is hardly surprising confidence levels are so low, given large parts of the economy are in lockdown.

High street retailers are likely to have lost some business permanently as spending moves online. These areas were already struggling with tight margins and competition so further failures seem likely. The airline and tourism industries have come to a halt whilst manufacturing has suffered disruption to supply chains. Furthermore, investment spending in the important oil and gas sector is likely to fall because of the current low oil price.

The US, the engine of world growth, has seen restrictions in movement hit its service-based economy hard. However, with an election later this year, the government is pulling all levers to support the economy. Furthermore, the country’s status as a hub of technology innovation should underpin future growth.

China, the world’s second largest economy, is likely to see growth fall towards zero this year, from 6.1% in 2019. Industrial output and retail sales tumbled in the first two months of the year but the country is slowly returning to work and there are tentative signs of recovery.

Prospects for investors

2020 so far has been a painful reminder that markets are not predictable and ‘black swan’ events, such as the coronavirus, can quickly change everything. However, whatever the crisis, historically people and businesses have adapted, confidence has improved and life has gradually returned to a new normal.  

There is clearly a material impact on company profits as lockdowns cut economic activity and demand. Nevertheless, industries with secular growth characteristics should continue to prosper. Long-term themes, including healthcare, technology, online services and sustainable production and consumption remain intact.

Scrapping dividends is usually seen as a sign of weakness but not these days. Investors recognise the need to preserve cash, to protect future viability, as a sensible strategy. UK banks, for example, have responded to pressure from the Bank of England to suspend dividends, share buybacks and bonuses and focus on lending to businesses and households.

The most important thing is not to panic; this is not the first bear market and it won’t be the last, so take a step back and remind yourself what your goals are. Selling after steep falls may prove unwise if you are investing for the medium or long-term. Calling the bottom is almost impossible, which is why drip-feeding money into the market might be a sensible approach if you have money to invest.

Experienced fund managers stick to their disciplined process and position their portfolios as appropriate. The Focus 50 contains funds which are highly rated by ourselves as well as our research partner Morningstar.  

1Gross Domestic Product

2 Purchasing Managers Indices