How Likely Is A V-Shaped Recovery? Some Factors To Consider
What’s happening? Goldman Sachs’ private wealth clients have been advised to return to equities, and US stocks in particular, with the optimistic expectation of a post-coronavirus recovery. Clients should invest in stocks now, one strategist told Bloomberg, in order to take advantage of low equity valuations and to position themselves for a rebound in the market. While Goldman sees a significant short-term decline in economic activity, it is forecasting a V-shaped recovery in H2 2020, enabled partly by the US government’s fiscal support measures.
Why does this matter? On the back of cheap oil, cheap debt, cheaper valuations and accommodating central bank policies, US indices this week hit levels reached only 18 months ago.
Quite a lot has, however, obviously changed in the last year and a half. Is this rally inspirational, hopeful or delusional?
Here are some points to consider to help arrive at an answer:
1. Stress tests for all? Will there be tougher regulatory oversite for many more sectors of the market?
Prospectively, all large companies, not just banks, may face a far harsher regulatory environment and be subjected to stress tests requiring them to hold additional capital going forward. Substantial cash buffers to meet staffing costs in times of crisis, for example, may be required before the approval of any distributions to shareholders.
2. Social vs economic return
Debt repayments might also weigh heavily on company distributions, even with record-low interest rates. When we look at delinquencies on student loans it doesn’t fill us with optimism.
In addition, the requirement for social returns (e.g. the creation of jobs) will, in all probability, take precedence over economic returns on capital. In an era of mass unemployment, social purpose will likely be a political necessity for those in power seeking re-election.
3. Environmental costs
Companies will be asked to outline their plans for a sustainable future and a transition to a low-carbon economy. Building renewable energy capacity, paying carbon offsets and environmental taxes could become new form of revenues for governments with stressed balance sheets.
4. Will a greater sense of social responsibility translate into less consumption?
Will mass consumption and gratuitous waste remain in fashion as the planet and public health assume a greater significance among consumers? Additionally, reduced consumption on debt grounds seems probable, as opposed to possible. Even if they wanted to, will consumers even be able to consume as they did before?
Nick Finegold is Founder & CEO of Curation Corp, an emerging and peripheral risks monitoring service.
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