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Beware of letting fear guide investment decisions

Shamik Dhar
Shamik Dhar11/4/2020 08:17 PM GMT+08  • 3 min read
Beware of letting fear guide investment decisions
Prospects for a good economic recovery have risen and we continue to favour risk-on positioning in portfolios.
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The course of Covid-19 remains the single most important determinant of the kind of economic recovery the world experiences. As part of our regular quarterly review, we forecast four main scenarios for the global economy’s recovery that investors should be aware of.

We forecast two scenarios in which the economic recovery is strong. In our first, most likely scenario this is largely because the disease remains under control until a vaccine appears in 2021 and widespread lockdowns are avoided. In this scenario the disease continues to fall away – both because of changed behaviour (social distancing, hygiene) and falling potency, what this would mean for the global economy is that it could hope to reach pre-crisis levels by mid-2021. We have given this scenario a 40% probability. On its own it is slightly odds against, but taken together with our ‘inflation’ scenario, our two strong recovery scenarios add up to a 60% probability – more likely than not.

However, despite taking a more positive outlook, the risks remain skewed to the downside. This is because in our downside scenarios we forecast significantly worse economic outcomes. In our ‘bad recovery’ scenario, the disease resurges and infection rates pick up significantly in a number of countries. We assign a 30% probability to this forecast. A northern and Asian winter spike is an important element of this scenario, but it’s not the only factor. In this world, the pessimism we see and hear today becomes a self-fulfilling prophecy, as households and companies sit on their savings and governments are unable to offset the hit to private demand. Fear itself plays an important role in holding the economy back and we don’t return to the pre-crisis level of economic activity until mid-2022.

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