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What will the stock market recovery look like after the coronavirus crisis is over?

George Trefgarne considers what the economy might look like after this crisis is over and we’ve reached the other side of the valley.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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A nine per cent one day rise in the London stock market last Tuesday was the biggest daily rise since 2008, and the recovery in the pound to $1.23 invites two hesitant questions. Is the corona crash over? And can we start to consider what the economy might look like on the other side of the valley?

Previous market crashes, notably in 1987, have demonstrated a pattern. The market falls steeply, there’s then a relief rally after governments and central banks come to the rescue. And then another leg down when investors despair again and realise that a recession is on the way, perhaps after some big companies are going to go bust. The news that Prime Minister Boris Johnson and the Health Secretary Matt Hancock both have coronavirus has not helped sentiment.

This second leg down usually drops to the same level as the initial crash. The recovery then builds from there, though of course there are no guarantees.

Relief rally

The good news is that the low of the FTSE 100 index for the current crash was 4,945 on Monday 23 March, by which time the index was 35% off its recent January peak. That was the day, if you remember, that Congress was still arguing with the White House over a stimulus package and there were fears of a “dollar shortage” which hit the pound. The severity of the corona crash has only been exceeded once, in 1929, when by this stage the US market was 45% below its peak.

If we’ve enjoyed a relief rally, and the market follows a 1987-style pattern, then it’ll only drop back as far as around the previous low.

The healing process for a shock of this kind usually involves government intervention and around the world, the authorities have mobilised huge financial forces at great speed. I can’t personally think of a time outside wartime when governments have moved so fast.

What are the governments doing?

In a briefing for the investment bank Stifel, Chris Watling of Longview Economics calculates that governments and central banks have made interventions worth around $5.5 trillion, or 14% of GDP, in advanced economies. And the collapse in the oil price has given consumers another shot in the arm worth 1.5% of GDP via lower fuel costs.

Let’s consider what has happened in the UK. The new Governor of the Bank of England, Andrew Bailey, and the new Chancellor, Rishi Sunak, have worked together to introduce a number of measures to tackle the crisis. They’ve cut interest rates twice, introduced £330 billion of loan guarantees, £200 billion of quantitative easing, and have spent at least an additional £27 billion, guaranteeing 80% of salaries up to a certain level and grants to small businesses. Tax payments, such as VAT, have also been deferred and a package for freelancers and the self-employed has been announced.

The corona cash crunch

On Wednesday, the Bank of England warned of “a very sharp reduction in economic activity”. These interventions will just about match the unprecedented, brutal fall in the GDP forecast for the second quarter, of some 15%. Already, an additional 500,000 people have signed on for out of work benefits and the Budget deficit is expected to spiral towards 8% of GDP, the level it hit during the financial crisis.

Most government relief schemes have been publicised but will not be up and running for weeks or even months, with the consequence that a terrible cash crunch is smashing through the economy. An immediate, interim cash payment to individuals, like America where the US Treasury is sending everybody $1,200, may yet be required, especially for freelancers and small businesses.

From now on, we should expect investors to take an obsessive interest in every piece of data related to coronavirus – the number of cases, tests, deaths and any new technology or drugs which can help tackle the crisis. The unemployment numbers will also be critical.

A summer recovery?

Assuming the health crisis does begin to pass in the early part of the summer, and this is a big assumption, there could be a rapid second half recovery. People will go back to work, factories will reopen and all that money injected into the economy will start to make itself felt in the form of a surge in consumer spending and business investment.

Some sectors could really benefit. Those companies delivering for the digital, work from home, economy, pharmaceutical, biotech and medical sectors coming up with products to keep future viruses at bay. But some could also suffer, such as commercial property as tenants might reduce their office space, and the so-called ‘unicorns’ – highly valued tech companies which don’t always make a profit.

What is known as “deglobalisation” is also likely to be a theme as companies could bring their manufacturing operations back onshore and build up stocks in the supply chain, so that they’re not left with shortages in future.

Looking into the future

There are two big risks to consider. The first is a prolonged lockdown because, try as we might, we can’t control the pandemic. But, even in such a worrying eventuality, South Korea, China and Singapore have shown that harnessing tracing technology and rapid testing should allow a progressive lifting of restrictions so people can go back to work.

The second is a return of inflation. The vast amount of money injected into the economy could stoke up demand just at a time when deglobalisation makes it more inefficient and Generation Z start to earn and spend more as they enter the workforce.

When the recovery does come, those investors who have had the patience to hold on for better times, could be rewarded with strong returns. Remember all investments can fall as well as rise in value so you may not get back what you invest.

George Trefgarne is CEO of Boscobel & Partners. He has more than 20 years' experience in communications, with a particular focus on strategy, thought leadership and financial services. George is a research fellow at the Centre for Policy Studies and an advisory board member at Open Europe.

This article is not personal advice. If not sure if an investment is right for you, please ask for advice. Hargreaves Lansdown may not share the views of the author.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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