What economic recovery could look like
The economic recovery from coronavirus is sure to be long and painful. Knowing which assets and sectors will lag for longer, and which are better placed to recover sooner, could help better inform your investment decisions.
"We're still facing a 'U-shaped' recovery," says Betashares chief economist David Bassanese.
"Things will get better, but the improvement will be gradual."
Benjamin Ong, director of economics and investments at Rainmaker Information, which publishes Money magazine, agrees that a U-shaped recovery is the most likely scenario.
"This is because while government and central bank stimulus measures are working to mitigate further weakening in demand - social restriction measures imposed around the globe would only be gradually lifted, and consumers and workers themselves remain wary of venturing out and spending their uncertain income/savings."
Still, both economists warn that the road to recovery will be plagued by setbacks and disappointment.
"We've done a good job containing COVID-19, but I'm not bullish," says Bassanese.
"The market will have another leg down due to disappointment around the speed of the recovery. Big cuts to earnings growth will need to be factored in."
Ong points out that some companies will have been rendered insolvent by the lockdowns, representing a permanent detraction from economic activity.
"And those that survive will have to restore broken supply chains or rundown their inventories stocked pre-corona."
Under a 'U-shaped' scenario, all sectors will likely remain under pressure. But resources may be the first out of the gate, provided China recovers strongly.
"China will probably fall back on more infrastructure and capital works to support growth," says Bassanese.
"Its export sector will remain weak and its domestic consumer spending will remain subdued, and this should keep our exports ticking over."
Similarly, Ong notes that a strengthening Chinese economy, if sustained, should spur a recovery in Australia's materials and industrials sectors, followed by financials as indications of a recovery slowly spreads."
"Energy would be the last to recover due to massive oversupply and the expected gradual lifting in demand."
Bassanese says bank hybrids - securities that combine debt instruments (fixed income) and shares - could provide a place of refuge for investors.
"Although bank dividends appear attractive, their share prices will remain under pressure. Hybrids hold up better in equity market weakness as defensive sources of income."
Whatever the case, central banks here and around the world will be under pressure to keep rates lower for longer and extend quantitative easing measures.
"Central banks around the world, including the RBA, would be in no rush to normalise monetary policy over the next 18 months, at best," says Ong.
"The Fed only started normalising policy in 2016 - seven years after the GFC."
"With central banks maintaining easy monetary conditions, gold prices will continue to strengthen," adds Bassanese.
Don't expect to see much growth in the bond market, however, as equities slowly recover.
"We're already at RBA's bond yield target, so there's only so much upside bonds can provide given yields can't rally significantly from here."
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