Edison Group Global perspectives: Economic life after lockdown

Edison Group Global perspectives: Economic life after lockdown

28.04.2020: Edison Group - Economic life after lockdown What will the re-start look like in the short, medium and long-term? The acute phase of the coronavirus crisis may be close to over. National governments may be keen to downplay it to maintain public com

Edison Group - Economic life after lockdown


What will the re-start look like in the short, medium and long-term?

The acute phase of the coronavirus crisis may be close to over. National governments may be keen to downplay it to maintain public compliance but during May almost all of the statutory lockdowns currently in place globally are expected to be relaxed. Diabolical flash PMI data for April may therefore represent the trough in economic sentiment for the very short-term. Yet at least until the end of the 2020, national economies will have to contend with the prospect of social distancing measures and the risk of a second wave of infections, a dampener for spending and investment.

For the longer-term, we expect an acceleration of the trend to conduct business digitally as it is now proven to be effective while cheaper, enables social distancing and has a smaller environmental footprint. We remain neutral on global equity markets as valuations have recovered from the distressed levels seen during March.

Exhibit 1: Lockdown periods nearly complete across developed markets
Source: National governments, Edison calculations

In only a few weeks, the strict lockdowns which have been imposed on a significant proportion of the global population will be eased at least in part, allowing schools and businesses to reopen. Strict non-pharmaceutical interventions have been effective in bringing R0  below 1 and infection rates are for most nations on declining trends. Yet the economic cost has been enormous. Over 25m jobs have been lost in the US alone and unemployment is forecast to double in the UK to 10% by the end of the year.

Economic considerations will drive the lockdown release schedule

It is not feasible from a social, political or economic perspective to allow strict lockdowns to continue for significantly longer periods in our view. Strict lockdowns impose such severe economic damage to both private sector and government balance sheets that structural damage to future GDP becomes an inevitability, even before considering the interruption to education and training programmes.

The recent PMI data for Europe and the US should be instructive for policymakers as record-low sentiment across the region highlights the damage being done to the global economy during April. Furthermore, projections from the UK’s Office of Budget Responsibility indicate that UK GDP may decline by 35% during Q220. We would not disagree with this assessment but would also highlight the same projections suggest that GDP will return to its previous trajectory by Q121. We find this somewhat optimistic in a world without a COVID-19 vaccine and, as a result, with social distancing still in place.

Nevertheless, in coming weeks investors are likely to welcome the flow of company news releases announcing the restart of operations as supply chains come back to life. Due to the time-lags involved there will also be insufficient infection rate data in the very short-term to signal whether less restrictive social distancing measures will result in the feared second surge in hospital admissions.

We suspect that in the relatively controlled environment of workplace settings such as construction sites, offices and factories, strict monitoring of facilities with improved hygiene and health tracking may be effective in reducing workplace transmissions while keeping productivity largely intact. In profitability terms these sectors will therefore be the first to recover, provided there is sufficient demand.

Post-lockdown social distancing an enduring threat to travel and leisure sector

In contrast, social and leisure activities and transportation hubs are where the greatest risks to an extended period of sub-par profitability lie in our view. These sectors are likely to suffer the longest coronavirus restrictions. Large gatherings of people are unlikely to be permitted until there is confidence that sufficiently effective tracking technology is available which can mitigate a potentially major super-spreader event, but without shuttering the economy. The inherent biological risks in large social gatherings will unfortunately have significant implications for live sporting events, the gambling sector and other leisure activities.

The resumption of international travel carries further political question marks, given the lack of a globally coordinated response to COVID-19. Politically, it will be difficult to sanction the resumption of flights to foreign destinations unless there is confidence that the corresponding nation has the epidemic properly controlled and sufficient monitoring is in place to ensure the health and tracking of passengers returning from trips overseas. In turn from a demand perspective, passengers are unlikely to wish to travel until there is confidence self-isolation will not be necessary upon their return home, as currently mooted in the UK in recent days.

The considerations for business owners are not just biological as there are likely to be serious profitability issues in the service sector for as long as social distancing remains in place. Most obviously many bars, restaurants and other entertainment venues will be unprofitable if forced to comply with social distancing measures such as closed bar areas and enforced table spacing. In the circumstances, many hospitality venues may choose to remain closed. Airline profitability would be significantly impacted by current suggestions to vacate the middle seat while lost revenues from ticket sales at sporting events may prejudice the sporting calendar even after fixtures are allowed.

Rolling lockdown release risks stymieing consumer demand

There is a meaningful risk that the forecast and significant rise in unemployment in many nations will add to the financial pressure on service sectors struggling to regain profitability while implementing social distancing. This interim socially distanced period between lockdown and vaccine will present a number of challenges in these sectors for which there are few easy answers.

The challenge for policy will therefore be how to implement a progressive rollback of lockdowns while maintaining a sufficient level of consumer demand to incentivise business to keep people on the payroll and continue investing wherever possible. We note the UK’s furlough schemes is unlikely to be extended indefinitely as it costs the government around 2% of GDP per month.

While a rolling restart might be optimal from a virus perspective, policies which mitigate the impact of rapidly rising unemployment in this scenario may be necessary, as the younger working-age segment of the population makes the lifestyle and financial sacrifices necessary to protect the health of older members of the public.

Fiscal support has been forthcoming but at what cost?

We believe at present investors are quite correct in assuming that extensive fiscal support will be made available to prevent the healthcare crisis turning into an extended period of sub-par economic activity. Fortunately for the global economy, the exogenous nature of this shock has precluded any talk of moral hazard which has in turn allowed a very rapid use of government balance sheets to address some of the distributional consequences of measures to control the spread of coronavirus.

Furthermore, the re-start of quantitative easing by central banks means that increased issuance of government bonds is likely to be readily absorbed at current market yields.

The longer-term impact on government balance sheets should not however be underestimated. Our initial view that lockdowns were likely to be imposed for weeks rather than months was largely based on the unsustainability of the extraordinary costs to national governments of shuttering the economy and supporting furloughed workers.

For example, the UK’s OBR has projected that UK debt to GDP will rise to 95% by 2021, 17% above its pre-COVID-19 reference scenario. This also assumes the rapid return to trend levels of GDP growth by the end of 2020. The reduction in interest rate expectations and the lingering concerns in terms of the sustainability of the debt burdens of developed nations has lent increasing support to the gold price during 2020 to date.

A transfer union? COVID-19 re-opens EU’s north/south divide

Furthermore, it is not the case that all developed nations are equal in the face of COVID-19. Existing fragilities in terms of debt sustainability will be emphasised in nations with higher debt/GDP burdens such those in Southern Europe. Furthermore, the higher share of tourism and leisure in GDP risks a very difficult summer for these regions as those activities are likely to be among the last to recover.

For these reasons, the EU and its member states will have to move swiftly to implement fiscal policies which can accommodate the very large deviations from trend GDP now expected in southern Europe. During this healthcare crisis, the spread between Italian government 10-year bonds and German bunds has risen from 1.5% to close to 2.5%, highlighting the risk of a failure to reach an agreement to once again support the economies at the periphery of the eurozone.

The beauty of Mario Draghi’s original “whatever it takes” speech in 2012 was that in the end only the prospect rather than the actuality of “Outright Monetary Transactions” were needed to restore confidence. Following coronavirus, specific and actual policy support is likely to be needed to ensure all nations within Europe can continue to fund themselves through a period of economic growth as weak as 2008. 

An initial EUR 540bn healthcare-related support package, finally agreed last week, is unlikely to be sufficient to compensate for the substantial shortfall in GDP expected in 2020.

EU commission talk of a trillion dollar recovery fund remains notional for at least for as long as Northern nations resist moves towards common debt instruments, such as corona-bonds. We believe investors should carefully monitor policy in Europe as there remains a risk that long-standing political impediments to wealth transfer obstruct the necessary financial flows required to deal with the fallout from COVID-19.

According to reports, there remains the long-standing division between France, Spain and Italy which favour grants to tackle the damage from COVID-19 and Northern European nations such as Germany where Angela Merkel has insisted any aid must ultimately be repaid. We expect there to be further wrangling over the matter at least until mid-May when the EU is expected return with further proposal, but would caution that earlier calls for mutual debt instruments appear to have been firmly ruled out.

Global equity valuations have rebounded following a 50% retracement

In terms of equity valuations, markets have on a global basis re-traced 50% of the initial losses following the introduction of substantial support programs from central banks. On a price/book basis, the top 600 global companies worldwide no longer appear inexpensive following the market recovery.

Similar rebounds in pricing to equity markets are also visible in credit markets as spreads have tightened notably since the peak of the sell-off during March.

Exhibit 2: Price/book of largest global companies now close to long term average

Excess returns from broad market exposure therefore appear to be in the rear-view mirror on a global basis. European equities do appear relatively cheaper even after the recent recovery, although investors there have to contend with both Brexit and potential eurozone stability remaining as outstanding question marks.

A sector focus is now appropriate rather than blanket market exposure

Following the recent recovery, we believe investors should take the opportunity to carefully review portfolios to ensure that equity risk is focused on the right companies and sectors. The release from lockdown in Europe and the US is a welcome development but also appears to be a more drawn-out and progressive affair than that seen in China earlier in the year.

Certain sectors are likely to see significant constraints on activity for a number of months ahead. Notably, “stay at home” orders for returning overseas travellers would be likely to have a strong negative impact on both business and leisure demand in the travel and hospitality sectors during the summer season.

We believe the behavioural changes in terms of social distancing are likely to persist where they have simply accelerated long-term trends in terms of the environment or digitalisation of the economy. Many businesses have now demonstrated that they can function with a significant degree of home working, allowing further compression of future office requirements. This also has implications for ancillary activities such as retail in business districts, as employees benefit from flexible hours and retail shifts further online.

Similarly, we suspect many corporates will take the opportunity to insist on travel only when it is absolutely necessary in future, initially to reduce the risk of COVID-19 infection but later to reduce corporate expenses as online business becomes an increasingly acceptable way of working. Progress in these areas implies a bright outlook for the digital alternatives to face-to-face communication. We expect a resurgence in growth in the full suite of digital remote working tools, from secure cloud-based corporate storage and application delivery to telepresence solutions.

Videoconferencing has traditionally been difficult to monetise and software as a result dated and clunky but further quality improvements should be expected to narrow the perceived quality differential between an actual and virtual meeting.

From an environmental perspective, less frequent transportation usage and a smaller office footprint has obvious environmental benefits both in terms of urban air pollution and global energy usage and the coronavirus episode will have highlighted wasteful and unproductive carbon emissions which can now be addressed.

Despite the upcoming release of lockdowns, as market valuations have already rebounded significantly from the lows of March we retain a neutral weighting to global equities. Should social distancing, contract tracing and testing measures sufficiently slow the spread of coronavirus post-lockdown, we expect economic activity will gradually return to normal over the next 12m, even if punctuated with further lockdowns in specific regions or cities, allowing risk premia in equity markets to contract further.

On the other hand, relatively high degree of compliance with lockdown instructions has left the population with very little immunity and a second wave of infections cannot at this point be excluded by any means.

Given the rebound in market valuations, we believe investors should be increasingly specific in terms of sectors and specific companies rather than pursuing blanket market exposure. There are some sectors such as healthcare and software which may pass through this episode virtually unscathed, leaving others dealing with the aftermath for up to a year, or least until a vaccine becomes available.

Ultra-low bond yields and the death of inflation – risks over the horizon?

At current ultra-low yields we view government bond markets with some caution given the size of the fiscal response required now and in coming years to offset the damage to the global economy. It has become something of a mantra in certain circles that public debt levels do not matter (although those resident in Greece may beg to differ) but long-term interest rate markets have progressively become dictated by central bank policy over the past decade and especially so over the last 3 months.

Those forecasting inflation have been proved “wrong” if they targeted CPI or long term bond yields – but on a number of occasions asset prices have in our view been pushed to higher valuation levels than warranted by other fundamentals, and as intended by monetary policymakers.

We do not expect central banks to step back from their expanded role for the foreseeable future which is intellectually one of the least comforting but practically one of the strongest reasons to maintain risk exposures in portfolios. Nevertheless, the strong performance of gold this year is a warning shot to those who consider that large fiscal deficits combined with monetary policy in today’s form has no limits.

The Edison Group-- also photos

Permanent-URL: http://www.automobilsport.com/edison-group-global-perspectives-economic-life-lockdown---206432.html

28.04.2020 / MaP

More News

Mitsubishi Motors Announces Production, Sales and Export Figures for March 2020 and 2019 Fiscal Year
          March 2020     Fiscal Year 2019 (19/04-20/03)     Calendar Year 2020 (20/01-20/03) Volume    more >>
Toyota passes 15 million hybrid electric vehicles global sales
    Pioneer and leader in hybrid electric technology, Toyota has crossed the symbolic milestone of 15 million hybrid vehicles sold since the 1997 launch of the iconic Prius, the first full hybrid mass-produced car    Now offered on 44 individual models across a wide range of size and body types, Toyota's hybrid electric technology ha more >>
Kia Motors announces 2020 Q1 business results
    Q1 global vehicle sales totaled 648,685 units, down 1.9% Y/y    Q1 sales revenue at KRW 14.57 trillion, up 17.1% Y/y on favorable exchange rates and improved product mix    Q1 operating profit at KRW 444.5 billion, down 25.2% Y/y    Q1 net profit decreased 59% Y/y to KRW 266 billion more >>
Daimler preliminary results for the first quarter 2020 and outlook for the financial year 2020
As a result of the COVID-19 pandemic, market expectations for Daimler’s first quarter 2020 appear to show a large degree of variation. Against this background Daimler announces the following:Preliminary figures for the first quarter 2020 are in line with our more >>
Groupe Renault’s revenues of €10,125 million in the first quarter of 2020
    The Group sold 672,962 vehicles in the quarter, down -25.9% in a global market down -24.6%[1].    Group revenues reached €10,125 million (-19.2%) in the quarter. At constant exchange rates and perimeter[2], the decrease would hav more >>
Groupe PSA: Publication of the 2019 Universal Registration Document
Groupe PSA announces the publication of its 2019 Universal Registration Document. The latter has been filed with the French Autorité des Marchés Financiers (AMF) and registered under D.20-0327, on April 21, 2020. The 2019 Universal Registration Document more >>
PSA - Q1 2020 Group revenue at €15.2 billion
•    Groupe PSA Q1 revenue down by 15.6% at €15.2 billion;•    Automotive division[1] revenue down by 15.7% at €11.9 billion driven by a sharp volume drop partially offset by a strong product mix; more >>
The car distribution company Alcomotive becomes a joint venture between Alcopa and Bergé Auto
Today, Alcopa and Bergé Auto have announced their intention to make Alcomotive a joint venture for car distribution. Bergé Auto will be the majority partner with a 60% share, while Alcopa will hold the remaining 40%.Alcomotive dis more >>
Business and Covid-19 - testing times ahead for the automotive industry
You will be tested to find an industry that has not been impacted by the coronavirus, which has locked down cities and prevented companies from operating. Perhaps hit hardest, the automotive industry has had even more thrown on its plate, which has forced closures of factories and businesses worldwide. more >>
Tiguan: Global bestseller breaks the six million mark and has been the best-selling Volkswagen in 2019
Tiguan hits the six million mark Tiguan 2.0 TSI BMT 4MOTION 132 kW - Fuel consumption in l/100 km: urban 9.1 - 9.0 / extra urban 6.4 - 6.3 / combined 7.4 - 7.3; CO2 emissions combined in g/km: 170 - 168; efficiency class: D  more >>
Porsche delivers around 53,000 cars in the first quarter of 2020
Challenging start to the year for the sports car manufacturerIn the first three months of 2020, Porsche handed over a total of 53,125 cars to customers worldwide. Compared to the year before, deliveries were down by 5 percent due to the eff more >>
EU Commission clears creation of joint venture by VW and Munich RE
The European Commission has approved, under the EU Merger Regulation, the creation of a joint venture by MHP Management- und IT-Beratung GmbH (“MHP”), subsidiary of Dr. Ing. h.c. F. Porsche Aktiengesellschaft (“Porsche”), which is ultimately controlled by Volkswagen Group (“VW”), and Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft more >>
Porsche SE reduces its forecast for the Group profit after tax for the 2020 fiscal year
Porsche Automobil Holding SE, Stuttgart ("Porsche SE"), is reducing its forecast for the Group profit after tax for fiscal 2020. The profit of the Porsche SE Group will be significantly influenced by the at equity result attributable to Porsche SE and thus by the earnings situation of the Volkswagen Group. Volkswagen AG has announced that the outlook for more >>
Groupe Renault sets its new Strategy for China
• Groupe Renault will focus in China on light commercial vehicles (LCV) and electric vehicles (EV).   • Groupe Renault will transfer its shares in Dongfeng Renault Automotive Company Ltd (DRAC) to Dongfeng Motor Corporation. DRAC more >>
Toyota Motor Europe posts first quarter sales results amid COVID-19 crisis
    TME reports 271,937 vehicles sold between January-March 2020, down -2.45%, as the market sharply declined    Continued strong demand for its hybrid electric vehicles which make up 52% of total sales and 64% in West Europe    Toyota’s European plants currently closed as the COVID-19 crisis impacts more >>
Global sales of the Toyota RAV4 reach 10 million units
    Toyota’s ground-breaking SUV reaches 10 million sales landmark    Total achieved across 26 years and five model generations    RAV4 founded the market for compact, urban SUVs and has remained an international best-seller    Toyota prepares for another new cha more >>
Renault's Board of Directors communication
 •    Annual General Meeting of Shareholders to take place on June 19, 2020 •    Cancellation of the dividend for the 2019 financial year•    25% reduction in compensation for the Chairman and interim CEO•    25% reduction in Directors' 2020 attendance fees more >>
Volkswagen and IG Metall successfully complete pay negotiations
Volkswagen chief negotiator Arne Meiswinkel: agreement with a short term and practical solutions in the coronavirus crisis Volkswagen and IG Metall have brought their negotiations for Volkswagen AG employees covered by the company collective agreement to a successful conclusion. As a result of the coronavirus crisis, the negotiations took place und more >>
Mercedes-Benz delivers approximately 477,400 cars worldwide in Q1
    Britta Seeger: “Together with our global retail partners, we have further strengthened our online activities.”    Mercedes-Benz Vans sold about 64,600 commercial vans in the first quarter of 2020.    Significant impact of worldwide COVID-19 pandemic and temporary closures of retail businesse more >>
UK new car registrations fall -44,4% in March as Coronavirus crisis hits market
    UK new car registrations fall -44.4% in March as coronavirus crisis causes showrooms to close.    Steeper fall than during last financial crisis and worst March since late nineties with some 203,370 fewer cars sold in the month.1    Early SMMT analysis downgrades 2020 outlook to 1.73 million units, -23% more >>
411,809 BMW vehicles delivered in first quarter 2020
A total of 411,809 (-20.1%) BMW vehicles were delivered to customers in the first three months of the year. The MINI brand sold 64,449 (-23.4%) units during the same period. In the first quarter 30,692 (+13.9%) electrified vehicles of the BMW and MINI brands more >>
BMW Group focuses on flexibility and solidarity in dealing with Coronavirus Pandemic
Protecting employees and taking responsibility for society - Safeguarding liquidity and the company’s long-term success -  Around 80% of retail outlets closed in Europe; 70% in the US -  BMW Group sells 477.111 vehicles in first quarter -  Pieter Nota: “China shows first signs of recovery” more >>
Groupe PSA signs an additional € 3 billion syndicated loan
In the current Covid-19 context, Groupe PSA strengthens its financial security with a new syndicated loan amounting to €3 billion in addition to the existing €3 billion undrawn confirmed line of credit for a total amount of € 6 billion. This syndicated loan ha more >>
Volvo Cars reports first quarter global sales
Volvo Cars sold 131,889 cars in the first quarter of 2020, down 18.2 per cent compared with the same period last year. The company’s global sales performance was affected by the continued impact of the Coronavirus pandemic.In March, Volv more >>
Postponement of the Peugeot SA Shareholders’ General Meeting
In the context of the Covid-19 epidemic around the world, the Managing Board of Peugeot S.A., in agreement with the Supervisory Board, has decided to postpone the Annual Shareholders’ General Meeting, initially scheduled on May 14th, to June 25th, 2020 A press release will be issued at a later date to inform shareholders of the arrangements for this Shar more >>
BMW of North America Reports Q1 2020 Sales Results
BMW of North America announced today Q1 2020 sales results for the BMW and MINI brands in the U.S.  For the sales period ending March 31, 2020 BMW brand sales totaled 59,455 vehicles, a decrease of 15.3% vs the 70,227 vehicles sold in the same time period last year.* more >>
American Honda Reports March Auto Sales in the Face of Difficult Market Conditions
After a strong start to 2020, American Honda sales fall 48% in March due to impact of COVID-19 pandemic American Honda     Q1     Total 298,785 -19.2%Cars 131,845 -22%Trucks more >>
Kia Motors America Announces March Sales
Best-Ever First Quarter Sales of the Sportage SUVKia Motors America today announced March sales of 45,413 vehicles, led by the Optima and Forte. The first three months of 2020 saw the Sportage SUV – Kia’s longest-running nameplate in the U.S. – realiz more >>
Henrik Wenders is responsible for the Audi brand, Sven Schuwirth focuses on the Digital Business
Henrik Wenders is taking over responsibility for the realignment and global marketing of the brand with the Four Rings. As Senior Vice President Audi Brand he will be in charge of Brand Strategy, Customer Insights and Brand Communication as well as Digital, Experiential and Sports Marketing. Sven Schuwirth, who previously held the position, will be responsible for the area „Digital Experi more >>
Kia Motors announces March global sales
Kia Motors Corporation today announced its March 2020 global sales results, recording a total of 226,960 units sold, which represents 6.4 percent decrease from March 2019.Globally, the Sportage SUV was at the top of Kia’s sales with 28,977 units sold, followed by more >>
Porsche SE: Postponement of the Annual General Meeting 2020
Originally planned date cannot take place due to the Corona pandemic / New date is being soughtThe Annual General Meeting 2020 of Porsche Automobil Holding SE (Porsche SE), Stuttgart, will be postponed against the background of existing bans on meetings in connection with the spread of the corona virus. The event, whic more >>
Matthew Weaver appointed Vice President, Nissan Design Europe
    Currently Design Director at Nissan's London-based design studio    Long resumé, including work on Qashqai, Juke and Infiniti modelsNissan's design function within Europe has been refr more >>
Mitsubishi Motors Announces Production, Sales and Export Figures for February 2020
February 2020     Fiscal Year 2019 (19/04-20/2)     Calendar Year 2020 (20/1-20/2) Volume     YoY(%)     Volume     YoY(%)     Volume     YoY(%)   more >>
Sales of Lexus Hybrid SUVs reach quarter of a million milestone in Europe
    Lexus announces sales of its hybrid SUV/crossover models in Europe have passed 250,000 units    Landmark total achieved at the end of February 2020, comprising cumulative sales of RX, NX and UX hybrid models since the launch of the RX 400h in 2005, the world’s first luxury hybrid vehicle    SUV/cr more >>
UK Car production steady in February, down -0.8% as sector braces for Coronavirus impact
UK CAR MANUFACTURING (data for February)    UK car production declines -0.8% in February, with some 1,033 fewer units made.    Output for domestic market climbs 7.8% while exports fall -3.1% to 94,999, reflecting fundamentally s more >>
UK Commercial Vehicle manufacturing down -13,6% in Februar as sector supports fight against Coronavirus
UK COMMERCIAL VEHICLE MANUFACTURING    British commercial vehicle output falls -13.6% in February, with 7,980 units produced.    Exports drive decline, down -26.2%, as output for UK market rises by 417 units.    Crucial commercial vehicle sector calls for more government action to ensure uninterrupted more >>
Volvo Cars restructures executive management
Volvo Cars is restructuring its executive management, starting 14 April, to effectively position the company to capture business opportunities from the transformation of the automotive industry.Unde more >>
Kia Motors Corporation appoints Ho-sung Song as President
    Song will spearhead advancement of company’s mid- to long-term strategy ‘Plan S’    Song’s extensive experience across automotive value chain, expertise in overseas operations are expected to help company’s transition to future businesses — electric vehicles and mobility solutions more >>
Mitsubishi Motors Corporation Personnel Change
MITSUBISHI MOTORS CORPORATION today announced the following important personnel change effective March 26, 2020. Important Personnel ChangesEffective March 26, 2020  more >>
2001-2023 copyright automobilsport.com