Morgan Stanley: Yes, A Second Wave Is Coming But It Won’t Derail The V-Shaped Recovery
We received a stark reminder this week that the fight against COVID-19 is not over, as new cases globally thrice reached new highs. Unsurprisingly, the number one question we get from investors is whether this resurgence disrupts our call for a V-shaped recovery. The answer is no. We remain confident that the global economy will regain its pre-COVID-19 levels in four quarters and DM economies in eight quarters.
Three debates dominate our dialogue with traders – the effect of the surge in new instances on the boom, persevering with high unemployment and flagging resolve for monetary stimulus.
First, the resurgence: nearby officials in new us hotspots have paused plans for reopening and are re-emphasizing the need for face coverings and social distancing. This will probably cause some lack of economic momentum in those areas but persevered improvement in maximum other states should carry the aggregates. We’d note that social distancing is much less in all likelihood to exert a drag on typical intake spend than anticipated, as purchasers have adapted. The bucks not spent on segments like a journey and eating out are being diverted to different categories.
Searching on the top 20 states through GDP, most of the people have accomplished higher ranges of mobility and economic pastime without an upward thrust in new cases, pointing the way to renewed financial interest without a big upward thrust in infections. Especially, the reopening within the northeast will bolster general monetary interest.
In Asia and Germany, increased testing and tracing allow coverage-makers to quickly zero in on new COVID-19 clusters. Till a vaccine is broadly available, we may want to see comparable selective and rolling responses, but in aggregate we see worldwide financial hobby continuing to enhance.
Progress on treatment and vaccines is likewise encouraging. Our us biotechnology analyst Matthew Harrison sees an excessive chance of fulfillment for antibody strategies to remedy, with availability through the quit of august. He keeps assuming that a vaccine can be approved for emergency use through healthcare people in autumn 2020, with vaccines available to the overall populace via 1q21 and herd immunity practicable via summer 2021.
2nd, unemployment: buyers are concerned that excessive unemployment will constrain the pace of restoration in the intake. We argue that the link among the labor market and consumption is looser than normally thought. All through the GFC, for instance, consumption in us had already recovered to pre-recession stages by using 3q10, even though the unemployment rate remained simply 50bp off its height at nine.5%. In addition, patron spends within the euro location had nearly recovered to pre-recession levels by 4q10, despite the fact that unemployment continued to hover around 10%.
Furthermore, the starting point for family balance sheets shows that they’re in a way better form getting into this recession. Higher- and center-income segments of the workforce, which account for the larger proportion of intake, had been much less impacted. And decrease-income households, while disproportionately affected, had been protected from the worst effects of the recession, with two-thirds of the eligible unemployed in impact amassing extra than their pre-recession income.
Third, coverage stimulus: as our head folks public coverage Michael zezas wrote in last week’s Sunday begin, most buyers believe that in addition monetary expansion could face political roadblocks. In contrast, we assume that policy-makers have rediscovered active monetary coverage, the use of it without hesitation this time around – mainly because the recession turned into brought about with the aid of an exogenous shock inside the shape of a public fitness crisis. We assume us coverage-makers to enact an additional us$1 trillion in fiscal stimulus. Whilst buyers are laser-targeted on how the virus outbreak will influence the outlook, we assume that they should no longer forget about the vast policy backstop, which is a key driver in helping the restoration.
Searching beforehand, we do count on new clusters of infections to emerge, and our base case assumes a second wave in the autumn and winter. But, we suppose that public fitness structures may be higher positioned to control the second one wave. Testing and tracking ability is ramping up, the authorities are greater attuned to capacity lines on scientific equipment and services, and we agree with that they may stockpile elements in advance of the fall. We suppose that renewed social distancing and selective and rolling lockdowns will keep outbreaks in taking a look at without strict nationwide measures (just like the ones we noticed in march-April this yr). Hence, we consider that the worldwide economic system can be capable of maintaining its recovery and keep away from a double-dip, maintaining us firmly within the v camp.
Source: Zero Hedge