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Luc de la Durantaye, chief investment strategist and CIO, CIBC Asset Management.
The current environment is quite uncertain. So the framework that we have to get an idea of where the economy is going is the following… One is, we’re looking at the pandemic, the evolution of the new cases in the pandemic, and on that note, we’re starting to see that physical distancing is starting to work. There’s a very large portion of the world population that now is under one form or another of the imposed social distancing and we are starting to see the growth of new cases in COVID-19 slowing. That’s a positive element.
Related to that, we have a template with Asia. It took them about a month and a half to two months, depending on the countries that were more successful, countries that were less successful, before they could start gradually reopening their economies. That would put Europe and North America somewhere in the mid May to late May, early June, to see a stabilization in new cases and considering measures to slowly ease social distancing and reopening businesses.
So, we think that it’s going to be an unprecedented declining economic activity in the first half of 2020 with a gradual recovery in the second half of 2020 and into 2021. So, applying numbers to this is quite difficult. I would say the guesstimate we have is for 2020, economic activity will be at recession in the order of two to two and a half percent growth year-on-year, with the recovery in 2021. I think that’s the middle of the road scenario. Obviously, there’s scenarios that are going to differ depending on how the pandemic is evolving.
We also have other signposts. The fiscal measures and monetary policy measures have been very strong, much quicker than before, much larger than before. This should help in terms of putting a floor on financial markets. In that sense, the correction that we’ve seen has uncovered a number of opportunities in terms of equity markets, in terms of credit markets, both on the investment grade and the high yield grade. Which I think investors should start to take a look into and seeing some of these opportunities. Because, looking forward, the expected returns, the longer term expected return, when we lift our eyes a little bit off of the next three months and we look out one to two years, the expected returns in financial markets has improved because of the sharp corrections that we’ve seen.
In terms of gaging what kind of recovery we will have, it will be also dependent on a number of developments. One is that, if we can find soon an antiviral, the treatment, that could ease some of the lock-downs that we see. It would also ease mentally the state of the consumer and could trigger a decent easing of measures as well as recovery in consumption.
Of course, a full recovery that would lead to taking all the measures and going back to a more normal life is probably unlikely until we get a vaccine. And the science that we have been in touch with, that we have been reading about so far, is that that is about a year away from now. And so, from that perspective, that’s why we have a more of a moderate recovery in the second half of 2020 and early 2021 based on that fact that the vaccine is probably a year away from now.
That being said, there’s a lot of efforts that are being done, and so we could be pleasantly surprised. I think investors will have to monitor these developments very closely because, as we can see, we’re still in an environment that is relatively volatile, because markets remain uncertain about a number of these outcomes.