Introduction and review of our prior outlook

Very few could have foreseen how deeply this crisis would descend. We certainly did not. Financial panics often occur “out of the blue”, and the fact that US credit and equity markets were “priced for perfection” and heavily leveraged made the tumble much worse. The recent massive involvement of the US Treasury and Federal Reserve (Fed) throughout private credit markets takes markets into uncharted territory, although the European Central Bank (ECB) and the Bank of Japan (BOJ) have, in smaller scale, long led the way in several aspects. The near-infinite expansion of sovereign bond QE also is an incomparable shock to the system, almost like setting to maximum the electricity used to stimulate the brain of a comatose patient. Better to have the patient alive, but the consequences and subsequent treatments are unknown. On the positive side, it is important to remember that China’s economy, which is key to the global production supply chain and a major engine for global demand, is on the mend.

We have long thought that the odds were very high that the novel coronavirus would dissipate in a reasonably expeditious manner, for which we now target a mid to late April peak in the developed world. Unfortunately, the damage done, including to political and social systems, in order to achieve such, and the ability to recover from it, is what we needed to address in this meeting. There are no proper parallels in history and nothing will ever be quite the same, so it will take mental flexibility and knowledge of human nature and politics to steer a proper investment course. We don’t claim super-human status, but our Global Investment Committee members have immense amounts of experience as leaders of our equity, fixed income and multi-asset teams around the world, so we hope to provide as solid advice as humanly possible.

The global economy’s 1H plunge should disappoint consensus and 2H rebound should be moderate

In our new outlook, due to all the uncertainty, we concentrate on the economy and markets only through September, rather than the usual next twelve months. Although we look for a recovery after June, the G-3 and Chinese economies should plunge, moderately below consensus (which is very hard to discern right now, changing daily but with some estimates still very stale, so we made our own assumptions for such) in the 1H, and also slightly disappoint in the 2H, at least in the US. The 2H recovery should be moderate, with a disinflationary tenor. For the U.S., GDP should be -7.8% half on half seasonally adjusted unannualised rate (HoH SAAR, as used in all references below) in the 1H20 and 2.2% in the 2H20, vs. the -5.0% and +3.0% consensus estimates. In the 1H, personal consumption and private capex should sink, but government spending and net foreign trade should contribute to growth. Boeing’s aircraft production problems will exacerbate the growth problem. In the 2H, personal consumption should improve and government spending will remain strong, but capex is likely to remain weak and net foreign trade should stop contributing to growth.

Eurozone GDP should be very similar, at -8.2% and 2.4%, vs. consensus estimates of -5% and 2.2%, respectively, while Japan’s will likely be -6.2% and 3.0%, vs. consensus estimates of -4.2% and 2.0%. Japan’s 1HCY19 figure is better than the others as its 4QCY19 base was already weak due to the VAT hike and natural disasters then. For the Eurozone and Japan, personal consumption, private capex and government spending should follow the US experience, but net foreign trade’s contribution will have various trends. For CY20, growth for the US, Eurozone and Japan should be -2.9%, -3.1% and -2.7%, respectively (vs. consensus of -1.3%, -1.4% and -1.9%). Lastly, China’s official GDP should be -12.2% HoH SAAR in the 1H and +8.3% in the 2H, with CY20 GDP at -2.7%. Its 1H is worse than the G-3 because its crisis started early in the period, and due to this lower 1H base, its 2H rebound will be stronger than the G-3. Of course, the fact that its economy is already recovering is a major boost to the globe’s prospects. Overall, these G-4 1H GDP results should disappoint risk markets and keep fixed income markets relatively encouraged, but the 2H should not disappoint too much.