portrait of Evan Brown

Evan Brown

Head of Multi-Asset Strategy

portrait of Ryan Primmer

Ryan Primmer

Head of Investment Solutions

After the forced freeze, an uneven thaw

The opening act of the 2020s may have produced the event that defines the decade. An immense human toll and financial market upheaval linked to the COVID-19 pandemic turned every prediction for the year upside down. An unparalleled shutdown of global economic activity occurred, soon answered by policy support and mass doubt about the long-term future of work as well as social interactions.

Real GDP across scenarios

Real GDP forecasts in different scenarios of a bull market, stagflation, current baseline and 2019 levels

Possible narratives for the post-pandemic recovery

We believe the most powerful determinant of economic recovery will be the development of a still-elusive vaccine or proven treatment protocol, followed by a government pivot from providing a cushion to stimulus.


  • Swift progress on vaccines/ treatments facilitates broad reopening of activity.
  • Governments pivot from income support for locked-down economies to initiatives that enhance the speed of the recovery.
  • Monetary policy remains highly supportive of both markets and the economy.



  • Gradual recovery begins as economies reopen, with the strength of the local public policy response to the crisis determining relative outperformers.
  • Conservative Chinese stimulus limits extent of global cyclical upturn in activity.
  • Consumer spending recovers, but fails to eclipse pre-COVID-19 levels.
  • Meager rebounds in capital spending, global trade.


  • Premature fiscal retrenchment in US; EU recovery plan proves underwhelming.
  • Material second wave of infections forces return to lockdowns.
  • Geopolitical, trade, or US election risks increasingly weigh on economic outlook.

Three potential scenarios for the global economy post COVID-19 including a bull, base and bear case

A gradual, bumpy recovery

Therefore our base case, given that uncertainty, is for a gradual, uneven economic recovery. Capital spending is likely to stay in the doldrums in this highly uncertain backdrop, and the scope for households reducing saving rates is limited.

There is an upside scenario in which a faster than expected arrival of an effective vaccine allows for a comprehensive economic reopening, with governments nimbly turning to stimulus spending. Conversely, a downside case consisting of a second wave of COVID-19 that forces a return to economic lockdowns or the premature withdrawal of fiscal support amid continued private retrenchment lies within the range of possible outcomes. We intend to stay flexible to capture these relative value opportunities as they appear.

There is an upside scenario in which a faster than expected arrival of an effective vaccine allows for a comprehensive economic reopening.

COVID-19 drove equity volatility to financial crisis levels

Volatility in equities surged this year to levels not seen since the global financial crisis in 2008/2009

A balancing act

Asset allocation in any of these scenarios requires striking a delicate balance between fiscal and monetary support already deployed by central banks and governments to alleviate the economic damage, protecting against a possible protracted downturn and tepid recovery, and identifying opportunities for asymmetric upside should a proven therapy or vaccine allow for a more enduring rebound.

We retain exposure to themes and geographies that we believe stand to gain the most from an upswing, while limiting our overall risk if a more pessimistic scenario comes to pass.

Risk assets around the world have enjoyed substantial rallies since late March, as initial policy enthusiasm was followed by incremental progress on both public health outcomes and economic activity across the developed world. Nonetheless, in our base case scenario, lingering safety concerns will keep demand and capacity below pre-COVID-19 levels in 2020 and beyond.

Example of COVID-19-driven supply/demand imbalance in China

The supply and demand imbalance in terms of industrial production and retail sales in China

In the US, the potential end of enhanced unemployment benefits in July and looming austerity at the state and local government level constitute potential risks to the US economy. The importance of US consumption and the depth of the nation’s capital markets suggests that the policy response stateside will play an outsized role in mapping out the magnitude and contours of the global macroeconomic bounce as well as financial market performance.

Intense stress on firms, including a rash of bankruptcies during the economic standstill, has severed the links between employee and employers, introducing a source of friction that may prevent an immediate healing of labor markets and, in turn, consumption.

The Federal Reserve’s swift policy support for credit markets and commitment to ultra-low policy rates is only one factor to consider. The potential for market-unfriendly tax and regulatory changes that would come with a Democratic win of the presidency and both houses of Congress in the November presidential election may command more attention as the vote nears.

Where does this leave us?

Within US assets, we prefer investment grade and inflation-linked bonds, which benefit from central bank accommodation. The magnitude of the rally in risk assets leaves us neutral on global equities. The S&P 500 Index is pricing in a complete earnings recovery by the end of 2021 while trading at valuations rarely seen outside of the dot-com bubble. We prefer equities in markets including Japan and Germany, which are trading at much more attractive valuations.

Relatively robust safety nets in European nations and the nature of the authorities’ responses to the pandemic inspires optimism that the harm to the labor market, at least on a headline basis, will not be as severe as in the US. Attitudes towards government spending are shifting. A Franco-German recovery plan constitutes concrete progress towards the monetary union’s development of a collectivist approach to fiscal policy, which if enacted could drive domestic demand increases during the recovery phase. Negative funding rates through programs introduced by the European Central Bank encourage the narrowing of sovereign periphery spreads and lending to bolster the real economy.

The shape of the recovery

The shape of economic recovery – will it be u-shaped, w-shaped or v-shaped.

Policy support in Japan is ample, with the combination of highly accommodative central bank support and the government’s recent doubling of an assistance package. The deployment of monetary and fiscal easing goes back to the advent of Abenomics, a period associated with superior local returns.

China and Korea, which suffered from virus outbreaks before their emerging market counterparts, could outperform that cohort due to their status as the first to stabilize activity and implement strong contact tracing infrastructure. Dollar-denominated emerging market debt, particularly Asian countries, represents another area in which relative returns are skewed to the upside should risk appetite remain resilient.

The fiscal policy response from Beijing, meanwhile, is designed to do what is sufficient to support employment—but not much more.

An asynchronous snapback across nations will weigh on the ability of the world’s second-largest economy to capture a meaningful impulse from global demand; so too will China’s relatively limited fiscal thrust to date reinforce slower activity around the world.

Tensions between China and the US have also re-emerged on a number of fronts, including both the COVID-19 pandemic and Hong Kong’s status. An eventual reckoning on these issues threatens to fuel volatility not just in Chinese markets, but globally as well. Tactically, we believe the status of the phase one trade deal will stay at the forefront as a driver of local returns.

Markets have shown a relative inability to adequately price nebulous financial risks compared to well-defined disruption to the terms of trade. Nevertheless, we are underweight cyclical North Asian currencies against the safe haven Japanese yen, to hedge against an escalation of tensions or downside surprise in global growth.

We believe the status of the phase one trade deal will stay at the forefront as a driver of local returns.

The rest of the emerging markets cohort is likely to be weighed down by lackluster global growth and trade, with the conservative Chinese fiscal response offering less of a lift for this group compared to prior periods of fiscal loosening. Despite this, the cupboard is by no means bare when it comes to the opportunity set in emerging markets, including selective undervalued currencies.

Our risk exposures are designed to capitalize on opportunities with asymmetric upside amid a successful thawing of the global economy, guided chiefly by attractive valuations.

We will be guided by the knowledge that reopening is a necessary but insufficient prerequisite for a return to full economic health. In addition to breakthroughs in the medical field, public policy decisions will be instrumental in deciding the character — whether it be a V, a U, most likely in our view, a Nike ‘swoosh’ — that defines the shape of differing recoveries, as well as that of the world at large.

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