From Hurting to Healing


  • We expect the global economy and financial markets to transition from intense near-term pain to gradual healing over the next six to 12 months. However, there is the risk if not the likelihood of an uneven recovery, with significant setbacks along the way and some permanent damage that is not recouped.
  • Investors should brace themselves for a very different investment landscape as the weakest areas in the global credit spectrum will be exposed over the next several months.
  • While this should create more attractive entry points in higher-risk segments of the investment universe over time, we remain patient and focus on opportunities that we see as high quality, default-remote assets for now.

Following the longest expansion on record, the global economy is currently plunging into what could easily become one of the deepest but also shortest recessions in modern times. However, business cycle history offers few clues for what is likely to unfold over our cyclical six- to 12-month horizon, which makes the outlook even more uncertain than usual.

This time truly is different ...

There is no precedent and thus no good playbook for the global recession that is currently unfolding. Recessions are usually caused by the interplay between severe economic and/or financial imbalances building up during the expansion and a typical late-cycle tightening of monetary policy, sometimes aggravated by a sharp increase in the price of oil.

This time is very different because the underlying cause of the downturn is a truly exogenous shock that originated from outside the economic and financial sphere: a highly contagious new coronavirus that has been spreading fast in a globalized world since the start of the year. As the severe health crisis in several strongly affected regions illustrates, the COVID-19 pandemic threatens to overwhelm healthcare systems in many countries around the globe over the next few weeks and months.

Most governments have responded by aggressively curtailing economic and social activity in order to suppress the further spreading of the virus as quickly as possible. This has already led to a sharp drop in aggregate output and demand in many Western economies during the second half of March (for example, composite purchasing managers’ indices plummeted – see Figure 1), which is likely to continue in the near term as suppression efforts not only remain in place but are being intensified. Thus, we are seeing the first-ever recession by government decree – a necessary, temporary, partial shutdown of the economy aimed at preventing an even larger humanitarian crisis.

This figure shows composite purchasing managers’ indices or PMIs for the euro area, Japan, U.K., and U.S. Over the past 10 years, all these PMIs were largely range-bound between about 45 and 60, except for a brief dip in Japan’s PMI in 2011. Then, in March 2020, all four composite PMIs dropped significantly: The euro area to 31.4, Japan to 35.8, U.K. to 37.1, and U.S. to 40.5.Image Pop Up

Importantly, despite the record length of the expansion that likely ended this March, there were no major domestic economic imbalances in most advanced economies: Consumers were less exuberant than in the previous cycle, firms hadn’t overinvested in capacity, housing markets – with a few exceptions – didn’t overheat, and inflation was generally low and stable. All of this should be conducive to a recovery less impeded by economic legacy issues once the virus is under control.

However, we have been concerned about financial imbalances (as noted in this February blog post) that have been building in the U.S. corporate sector with a significant rise in leverage on the balance sheets of riskier and more cyclical companies. We return to this downside risk below.