Well-informed consultancy McKinsey & Co have produced a briefing note on two scenarios for the development of the virus in the months ahead, and the implications. It is the implications which concern us, as they give us a sense of the journey just ahead in financial terms. Below is a precis to help shine a light onto the months ahead.
Note that McKinsey accept these are only two middling views, and some “respected institutions”, as they put it, are expecting much higher virus infections. They intend to keep updating these scenarios, and we will look out for those.
The first scenario hints to me that we might start seeing signs of key stock markets bottoming by mid-April, but not sooner.
Here we consider the indicators which will suggest to us that this is the case. In the meantime, we are focussing building a shopping-list of funds
– the opportunities will be extremely attractive.
Over to McKinsey:
Scenario 1. Rising optimism by mid-May.
New infections peak in mid-April in US/Europe. Testing catches up with need. Virus proves seasonal.
By mid-May public sentiment is considerably more optimistic about the outlook.
Consumers stay at home, unemployment rises sharply, and bankruptcies soar.
Although the virus is under control by June, a recession continues until September. Only in the last quarter of the year does a genuine economic recovery begin to take hold.
The Autumn sees a resurgence of infections, but everyone is better prepared and the economy remains stable, albeit at a low level.
Scenario 2. Peak delayed, prolonged downturn
New infections do not peak in US/Europe until May, due to delayed testing and inadequate response to social distancing. The virus is not seasonal. China forced to keep in place some quarantining.
Consumers keep cutting spending all year, and unemployment and bankruptcies are notably worse than in scenario 1.
The economic impact is similar to 2008/9. Recovery only begins from April 2021.
Most importantly, in both scenarios a full-blown banking crisis such as occurred in 2008/9 is avoided. The banks are stronger and the authorities learnt vital lessons in 2008/9.
This means that you can be content to sit on cash until it is clear that investment opportunities are at hand. That will be a significant opportunity – we just need to be patient.