Monthly Macro Outlook: Decoupled recovery

Monthly Macro Outlook: Decoupled recovery by Michael McKenna
Risk sentiment is on the rise but most investors are still confident about the future. Betting the recovery is on a good track, more and more investors are looking at opportunities in value investing. We cannot deny there are growing signs of economic recovery, but it is also bright clear we are not out of the woods yet. We can all agree we have entered into a K-shaped recovery, which means that we are likely to see a growing decoupling of economic growth in coming months between countries, sectors and companies. Some will benefit from unprecedented fiscal and monetary stimulus, mostly big companies and the wealthiest, while others will face risk of lagging growth, bankruptcies and poverty, typically small companies and service profession workers.

China: A slow but steady return to growth

Over the past few weeks, there have been further indications of economic revival in China. The latest PMI out of China confirms what many expect of the Chinese economy the rest of the year: a slow but steady return to higher growth, mostly fueled by increased public sector’s fixed asset investment and higher capital inflows from foreign participation. South Korea exports to China, which is often viewed as a proxy for China’s growth by market participants, has surprised on the upside yesterday, rising 8.7% during September 1-20. This is another strong signal that the outlook is gradually improving in China, but also in the rest of Asia with stronger chip demand and semiconductors shipments according to the latest regional trade data.

Successful pandemic containment in Asia (with some notable exceptions, such as India) has managed to unleash the full potential of all the fiscal and monetary stimulus that has been implemented over the few past months to cope with the crisis.

Rest of the world: Uncertainty prevails

In the rest of the world, the outlook is still grimy. In many countries, the recovery has stalled in August/September and a second COVID-19 wave is hitting Europe, thus raising questions about the capacity to deal both with the seasonal flu and the pandemic in the northern hemisphere in the coming months. Governments will certainly avoid at all cost a full lockdown but localized lockdown and/or stricter social distancing measures are likely to be implemented in the short- and medium-term. Such measures, which seem unavoidable, will further fragilize the recovery and especially sectors and companies that were hit the hardest by the Spring lockdown.

In recent months, alphabet-obsessed economists have debated about the shape of the recovery. We can all agree now that we are facing a K-shaped recovery, which means we are likely to see a growing decoupling of economic activity at the macro- and microeconomic levels in the coming months between sectors and companies. In this scenario, some will benefit from unprecedented fiscal and monetary stimulus while others will face the risk of lagging growth, bankruptcies and poverty. In the post-COVID world, the winners will probably be big-box retail, U.S. banks and foremost tech and digital companies. A recent paper published by Gompers, Kaplan et al. (see here) finds that the negative impact of the pandemic on VC-backed companies (which mostly belong to the tech and digital sector) has been rather small. VCs report that 52% of their portfolio companies are positively affected or unaffected by the COVID-19 and only 10% are severely negatively impacted. At the other end of the spectrum, regular SMEs, especially in the service sector, are the losers. In many countries, they have not been able to bounce back from the pandemic as quickly as large companies have. In many cases, the capacity to rely on and leverage the digital economy has represented a differentiating key element to overcome the pandemic’s impact. Companies that will not be able to accelerate the digital transition cannot hope to recover fast from the crisis (typically the tourism sector which is often ill-prepared for the digital future) and will require public support for a longer period than most anticipate, or they will face the risk of bankruptcies.

Calendar of October 2020:

Early October: Virtual Conservative Party Conference in the UK.

October 2: NFP report.

October 7: VP Presidential debate in the U.S.

October 14: Opening of early voting in some U.S. states.

October 15: Second presidential debate in the U.S. and EU Council about Brexit (considered as “soft deadline” by Johnson’s government to reach an agreement).

October 22: Last presidential debate.

October 24: Florida opens for early in-person voting.

October 29: ECB meeting. The status quo is expected.


For more about the U.S. presidential election, please read our guide to November 3rd.

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