Market outlook: the short and long-term effects of Covid-19

Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments, looks at the pandemic’s impact on economies and markets and the outlook for the future.

The impact of the pandemic has seen markets plummet to lows then begin to swing back up again, seemingly on the slightest, isolated signs of relative positivity. Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments, looks at what in this situation is real and the potential for profound change over the longer term.

What’s moving markets: reality, or fear of missing out?

It was no surprise that markets plummeted in February and March as they tried to digest the unknown and vast potential impacts of the pandemic. However, it was perhaps more of a surprise that this initial decline was so relatively short lived.

Despite the dire circumstances – poor economic news, surging unemployment, falling output of goods and services, huge government borrowing – markets bounced back up in April. In fact, global share prices rose at their highest monthly level in nine years – no guide to the future of course, but interesting nevertheless. So why did markets move in such a contrary way to economics and what’s happening now?

Some commentators called it the ‘fomo’ rally – the fear of missing out – meaning that after such a sharp decline, investors anticipated a sharp recovery at some point and didn’t want to miss out on it. And as we know, how investors behave is often based on anticipation of facts, which may or may not arrive, and emotion.

So despite the negative news, some investors were reacting to any early signs that would support a recovery. These included huge, and timely, government and central bank steps to support economies, and the anticipation of widespread easing of lockdowns.

Since then, market moves have been much less pronounced but markets have remained volatile. Each piece of economic, policy or virus-related news is nudging markets higher or dragging them lower.

What’s real in this situation? Well, on one hand some of the positive news is just relative – it’s merely reversing, from a very low place, the unprecedented slowdown. The recovery is fragile and depends on how prevalent the virus is and how it’s managed in the coming months.

On the other hand, we’re seeing better growth in some countries than expected, and better exits from lockdown than expected. So investor sentiment is improving. And as individual announcements build momentum, they have the potential to fuel further market rallies.

Taking a step back from this shorter-term view of markets, let’s look more closely at the economic situation and what that could mean over the longer term.

Some signs of recovery among widespread damage

There are signs of economic recovery. As lockdowns are lifted around the world, there are some improvements in business and consumer confidence; from restaurant bookings and traffic congestion, to more timely data like US employment figures.

Social distancing measures have been eased earlier than we anticipated and so, at Aberdeen Standard Investments, we’ve revised our 2020 growth forecasts upwards. In April, our view was that the global economy would shrink by a little over 9% this year. We now think it will be closer to 7%.

While these early signs of recovery are welcome, the reality is clear: as well as the tragic cost to human life, the impact of Covid-19 is causing unprecedented deep recessions almost everywhere.

If our estimates are right, global gross domestic product (GDP) will have fallen by around 12% between January and April. That’s more than three times as large as during the global financial crisis of a decade ago. But unlike during the financial crisis, every major economy will shrink this year, with some European countries likely to see output (the amount of goods or services they produce) fall back to levels not seen since the early 2000s.

Employment is of course an area of huge concern. The economic impact is likely to be more moderate than we initially feared due to the Government support schemes, outside the US at least. However, looking at the number of employees relying on furlough schemes and shorter hours, we recognise the enormity of the decline in demand for labour.

While many investors are encouraged by genuine signs of recovery, the human cost, such as unemployment and indeed the impacts on our normal day-to-day lives, will sadly take much longer to improve. The pandemic is likely to cause profound, long-term change.

Potential long-term trends: negative and positive

The world after Covid-19 will undoubtedly be a different one. We may feel fundamental change in our personal lives. We’re also likely to see shifts in some of the trends across our societies, the decisions governments make about their own domestic economies and how they interact with other countries. And all of that is likely to affect market returns.

Negative drivers for economic growth and market returns include:

  • Individuals and businesses are likely to save more and spend less – so less money going into the economy and being spent on future development. This said, the pandemic has taught us that a higher savings “buffer” for individuals and companies and even companies may not be a bad thing
  • Unemployment is likely to be a long-term problem; even those companies returning to business soon will need to transition out of furlough and debt, and possibly operate at limited capacity. The hospitality industry, in the eye of the virus storm currently, is the best example of this
  • Populism may grow due to dissatisfaction among voters, damaged credibility of centrist politicians and increasing populist policies and ideologies. Populism isn’t necessarily a bad thing in itself; after all, it’s the election of politicians that garner the popular vote. But it has and may lead to market uncertainty, as we’ve seen in many countries around the world

But there are also positive trends:

  • Many technology companies, from gaming to IT infrastructure to remote healthcare, are benefiting from our move to work, socialise and live from home. The need to build business models that are more resilient to the impact of the pandemic will continue to increase the incentives for digital innovation and deployment
  • Over the period of the pandemic we’ve seen a much closer relationship between the private and public sector and businesses appreciating their broader duty to society. This is encouraging and perhaps heralds an even better relationship ahead
  • The Covid-19 pandemic has seen government and central banks around the world loosening purse strings to deal with immediate requirements, as well as much needed infrastructure projects

And one major factor – globalisation – could go either way:

  • Some countries may seek to become more self-sufficient, and tensions between China and the rest of the world may increase
  • However, in the wake of the virus, governments and voters may realise that important issues, including public health, climate change and crisis management, can only really be solved by countries working together

On balance, at Aberdeen Standard Investments, we expect the negative drivers to outweigh the positive ones – although the challenge of mapping the post-virus landscape is a challenging one. Economies and governments face huge challenges. Covid-19 has and is affecting every company, whether they’ve had to shut down operations, adapt how they operate, or respond to surging demand for their products or services.

As economies and companies grapple to emerge from the pandemic, it’s crucial that investors remain focused on quality (investment in robust and resilient companies), diversification (a spread of investments across different countries and sectors) and the long-term picture.

We’ll continue to closely monitor the long-term trends and I’ll share what these might mean for markets and investments over the coming months in market outlook.

The information in this blog or any response to comments should not be regarded as financial advice. Please remember that the value of your clients’ investments can go down as well as up and may be worth less than was paid in. Information is based on Aberdeen Standard Investments’ understanding in June 2020.

Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments

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