Making sense of the mismatch between current stock market levels and the economic and medical headlines has brought with it an alphabet soup of potential scenarios. Investors are hoping for a V-shaped recovery while most analysts think a more prolonged U-shaped outcome is more likely. The pessimistic view is that the rebound turns out to be L-shaped, returning to previous rates of growth, but at a permanently-scarred, lower level.
These visual representations are helpful to a point, but they miss a couple of crucial components for investors - time and scale. How deep is the V and how soon does it return to the earlier trajectory; how long is the U-shaped economic bathtub; how low does the L extend? Only by considering these can you make a judgement about how well the stock market is assessing the outlook.
To get a fix on these key questions, we at Fidelity have started asking nearly 150 of our analysts around the world what the companies they follow are telling them. The findings from the latest survey, which was carried out in early June, make a broadly optimistic assessment of the outlook, albeit with significant divergences between different regions and sectors and with some important caveats about what could still go wrong.
The first question relates to the duration of the recovery. How long before the current disruption comes to an end and we can say we are truly back to business as usual? The picture here is pretty much what you might expect, tracking the pandemic’s journey from China to Europe, the US and now the developing world, Latin America in particular. Chinese companies think they will be back to normal by the end of the year, while recovery won’t be complete in Europe and North America until next spring. For emerging markets, the impact of Covid-19 will be felt into the autumn of 2021.
From a sector perspective, there are also few real surprises. Energy is bouncing back quickly as the negative oil price of two months ago fades into the memory. Healthcare and IT are on the mend. Only consumer staples is experiencing greater pessimism as the loo-roll stampede is replaced by a dawning realisation that even this most defensive of sectors cannot ignore job losses and falling wages.
The next set of insights are around what the new normal might look like when it does arrive next year. Here, there is significant divergence between different sectors. The relative winners in healthcare and technology, for example, are expected to see activity around 10pc higher at the end of 2021 than it was in 2019. For these businesses, it really will be a case of crisis, what crisis? No surprise then that a recent Financial Times analysis of the companies prospering in the pandemic was dominated by these two areas - Amazon, for example, is more than US$400bn more valuable than it was at the start of the year.
At the other end of the scale, however, energy, industrial and financial companies, and those consumer businesses operating in the more discretionary parts of the market such as leisure and travel, may well take much longer to get back to previous levels of activity. Although the re-opening of non-essential stores saw some initial enthusiasm last week, many people will be reluctant to shop and fly again until a vaccine is available.
Many of us have simply realised that there is a great deal that we can do without.
The other key driver of consumption, and the third line of questioning for our analysts, is job security. Last week’s employment figures in the UK were a stark illustration of why Chancellor Rishi Sunak was right to introduce the furlough scheme and to extend it into the autumn and why the unwinding of that massively expensive support operation poses such a significant risk to the return to normal.
In the US, half of analysts expect permanent reductions in staff numbers at the companies they follow. In Europe, it is 40pc and the global average is a third. It is inconceivable that this will not trigger some kind of feedback loop into the consumer side of the economy both because of actual job losses and the fear and uncertainty for those still in work. Again, however, it is not a uniform picture. With supermarkets increasing their staffing levels and demand for workers in buoyant areas like IT also expected to be higher, this is as much a reshaping of the workforce as an overall reduction in its size.
This might explain why expectations of wage cuts are more moderate. Only 9pc of the analysts think there will be permanent cuts in pay across their sectors. This also reflects another shift in the corporate mindset during the pandemic away from protecting profitability at all costs and towards a more holistic concern for all stakeholders, including employees.
Only one in six analysts said their companies would not be willing to sacrifice some profits in order to pursue sustainability. The ‘S’ part of the environmental, social and governance (ESG) agenda has become increasingly important for a host of reasons including the growing power of social media and the importance of issues most obviously highlighted by the Black Lives Matter movement.
The most interesting conclusion from the answers to the questions we asked our analysts is not the overall picture - although we can probably take heart from this - but the wide dispersions between different regions and sectors. The need to discern between the winners and losers from the pandemic has never been clearer.
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