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The long and winding road to recovery?

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Is this the low point for the UK economy and the start of a long road to recovery?

Today the Office for National Statistics (ONS) announced that the UK economy shrank by 20.4% in April, the largest fall the UK has seen! That equates to a 10.4% fall in the three months to April 2020 which is also the biggest three-month fall. In fact, today’s figures, whilst slightly higher than market expectations merely confirm what economists and market commentators have been saying since the lockdown began. The question is whether this is the low point for the UK economy and the start of a long road to recovery?

In fact, the impact of the lockdown has been felt in different areas of the economy to differing degrees, although all areas have been impacted. The hospitality sector for example along with car manufacturers have been hit particularly hard. Could the recovery therefore also show mixed outcomes for sectors in the UK? The answer, I believe, is yes.

Unemployment has risen across the globe as a result of the pandemic and the UK is no exception, although Chancellor Rishi Sunak’s Coronavirus Job Retention Scheme (better known as the furlough scheme) has undoubtedly insulated the economy from more significant unemployment rates, although it does not protect all workers from redundancy. The extension of this scheme to October has also offered some reassurance to businesses, but some companies will be assessing their future prospects in the coming weeks, as lockdown eases, and considering whether redundancies are required.
Are there any signs of green shoots? The US market had recovered (prior to yesterday’s falls) back to levels seen before lockdown at the end of February, but this also masks a disparity. Technology stocks and in particular the FAANGs (Facebook, Amazon, Apple, Netflix and Google) had driven the rise in the S&P 500 Index. The UK, lacking a large listed technology sector and instead having a large oil and gas exposure, has seen the FTSE 100 Index lag the recovery seen in global equities (as the oil price fell precipitously).
Against this backdrop the shape of the future economic recovery could look different across regions and sectors of the economy.

Whilst V-shaped recoveries are typically associated with natural disasters, the scale of COVID-19 is beyond the scope of recent examples. However, technology companies have certainly experienced a V-shaped recovery to date and stocks have soared (or perhaps ‘Zoomed’) as more people work from home and technology requirements have increased, although there may be some pushback on capital expenditure from businesses in the coming months.
The U-shaped or W-shaped recoveries are expected to be more volatile and may see some retailers do well, whilst we lose some other long-standing High Street names.

One can easily see how the airline and travel industry is currently looking at more of an L-shaped recovery, where a return to profitable operations is some way off. The hospitality sector in the UK could be included here too, as the 2 metre social distancing rule effectively reduces potential headcounts for pubs and restaurants to around a third of normal levels. Nervousness amongst consumers may also well serve to reduce demand, which could keep headcounts below this level. 

One thing is certain, we should expect volatility to continue in markets whilst economies unlock and potentially re-lock in the event of a second wave of the pandemic. The market is always sensitive to sentiment and as investors' moods change one should expect volatility to remain elevated. For pension schemes we continue to advocate diversified portfolios to protect against volatility in different markets as well as strong liability matching for Defined Benefit schemes specifically.

Amanda Burdge
Partner and Head of Investment, Quantum