Covid-19: How Will The Recovery Play Out?

Feature Stories | May 14 2020

As economies begin to tentatively reopen in Australia and across the globe, analysts consider the possible bounce-back scenarios and sector and stock winners and losers.

-Not much to compare to
-The China experience
-Work and play variations
-Falling earnings forecasts

-Winners and losers

By Greg Peel

Lessons From History

While the world has experienced many an economic shock in the past century – the most recent being the GFC – all agree the Covid-19 shock is like nothing ever experienced in our lifetimes, given it is a health-based crisis, not a common or garden financial sector crisis or cyclical blow-off. To make any sort of comparison we have to go back to 1919.

The Spanish flu, which originated in the US and had nothing to do with Spain whatsoever until it arrived in that country before spreading to the UK – hence the (derogatory) label, is not a great comparison, being back in another era altogether, but it’s all we’ve got, and importantly it did feature social distancing and economic shutdowns.

At least for a period. Once restrictions were lifted, multiple outbreaks reappeared – a cautionary tale.

The only viable data in 1919 were generated in Sydney, hence Macquarie has made comparisons to the Covid experience only for NSW, which has been the worst hit state anyway. The broker found that adjusting for population, the Spanish flu produced four hundred times more cases in NSW than Covid, and resulted in three hundred times more deaths.

Notwithstanding a second Covid wave we don’t know about yet. And one need only point to technological advances in the meantime, not just medically but in rapid-speed communications, in order to downplay the variation. The Spanish flu tracing app didn’t get many takers.

Interestingly, Covid is set to send the country into an economic recession greater than any in our lifetimes in terms of depth, albeit balanced in likely duration. Macquarie can find no evidence of there even being a bear market in 1919. The 2020 pandemic followed (nearly) thirty years of uninterrupted economic growth. In 1917 Australia’s GDP fell -3% and in 1918 -4% (bit of a war on). In 1919 the economy actually grew as wartime restrictions were lifted.

So can we learn anything? Not really. Macquarie draws only upon the last two decades to note valuations are high at present, particularly in comparison to contractions over that period. The broker continues to suggest investors upgrade the quality of their portfolios.

For now, Macquarie believes the Australian market will remain range-bound between the March low and April high.


While the Covid crisis is unlike no other in our lifetimes, and the Spanish flu is too long ago to be worthy of comparison (other than second wave risk), we can draw upon a more immediate experience – FIFO. Nothing to do with airborne mine workers, but rather First In-First Out.

Australia ramped up to full lockdown in March. In mid-February, lockdowns in China were already being lifted. Not everywhere in the country – lockdowns lingered longer in more impacted provinces – but the experience at the source provides some level of guidance as to what Australia might expect as it, too, begins to gradually reopen.

There are good reasons to question China’s infection rates, Morgans notes, but unquestionable economic trends can be reliably analysed. The broker also suggests that if the virus was still rapidly spreading in China, Beijing would have not pushed for a reopening, and nor could any exponential increase be able to be covered up for a full two months.

The rebound in activity in China was fairly rapid. And the rebound was actually initially held back by the fact the lockdowns had trapped workers who had returned to hometowns for what were meant to be Lunar New Year celebrations. Even so, by early March it was evident, Morgans notes, that mid-February re-openings had led to a substantial recovery in activity across different sectors.

Morgans does not draw upon government-generated monthly data but on real-time indicators such as passenger numbers on subways, long distance travel, property sales and power output. A simple average of these four indicators reveals a 22% increase from 2019 levels after the restart in mid-February, rising to 52% by mid-March.

The recovery has nonetheless been uneven. Power demand has recovered 90% from the level a year ago, reflecting Chinese industrial activity, while service sector activity, as suggested by the other three indicators, has been more subdued. This makes sense, Morgans offers, given services depend more on social interaction and concerns about infection will linger.

If we translate this into Australian terms, Morgans suggests we could see a quick restart for industries such as resources, construction and manufacturing, but a more subdued start for service-oriented industries such as office REITs, travel, entertainment, bricks & mortar retail and non-essential health services.

As policymakers continue to roll out new support measures – both the government and the RBA are basically in “whatever it takes” mode – it is unlikely the pandemic will morph into a full-blown financial crisis, Morgans believes. Yet the ultimate impact on corporate balance sheets remains beholden to the uncertainty of how quickly the virus can be brought under control and thus how quickly economic activity resumes.

Equities are unlikely to stage a sustained recovery, Morgans warns. The stock market may have bounced back 25% but that does not imply investors can stop exercising caution when picking stocks.

The broker continues to favour companies with the strongest competitive/market positions, the strongest balance sheets and offering strategies that are able to adapt to the “new normal” and reposition in order to thrive through an eventual recovery. Investors should hold their nerve, as rare opportunities may present in the coming weeks and months.

To Work and to Play

Citi’s economists point out the obvious that different sectors will experience a diversity of recoveries. Adopting a global perspective, Citi divides all sectors roughly into two groups – “work” and “play”.

Sectors associated with “play”, or “unstructured” activities, include those that suffer most from social distancing, and may experience deeper contraction and/or slower recoveries than those associated with “work” or “structured activities", for which social distancing has less of an impact.

Play sectors include hotels and restaurants, air travel, arts, recreation, personal services and retail.

Work sectors include financial services, business services, and “high tech”.

Manufacturing is the odd sector out in global terms (not so much in Australia, where manufacturing is minimal), given the outsized scale of manufacturing in China and Western Europe in particular and the industry globally. The industry comes under the “structured” label, but significant declines in activity due to the virus suggest a longer recovery period.

We could look at this as a social distancing factor, given the necessary proximity of workers on factory floors (unless they’re all robots).

Citi’s base case scenario is that the global economy bottoms in the June quarter and begins to rebound in the second half of 2020. A more rapid rebound could be seen if economies lift lockdown and social distancing restrictions in the June quarter and the lingering fear factor among workers and consumers is low enough as to provide for faster normalisation of activity. This would suggest a V-shaped economic recovery.

More popular among pundits is an expected U-shaped recovery, based on fear lingering into the second half of the year, leading to lengthier disruptions in activity and/or a significant lag in a return to normal consumer demand.

Citi’s worst case scenario is one in which monetary and fiscal policy measures fail to overcome the economic impact. This would suggest an L-shaped recovery, which isn’t a recovery at all, rather a Depression.

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