Equity investors should prepare for a J-shaped economic recovery, with further market volatility likely to return in the third quarter, according to Legg Mason affiliate Martin Currie.
While the second quarter saw economies and stock markets rebound sharply in a V-shape, economic recovery will change as we move through the second half, says Zehrid Osmani, manager, Martin Currie Global Portfolio Trust.
Osmani explained: “As countries are now coming out of lockdown, the fiscal stimuli will be helping economies recover and we are likely to see some pickup in leading indicators over the next one to three months from the lows earlier in the year.
“Some of the initial improvement might appear rapid, which could give the illusion of a ‘V-shaped’ recovery. The shape of the economic recovery, however, is still highly uncertain, due to numerous unknowns about what a post-lockdown world looks like.”
Osmani warned volatility could return in the third quarter as a result of the vast uncertainty, especially if the strong momentum for the US economy does not continue.
He continued: “We are expecting a more gradual recovery now and this is being factored into the forecasts for the companies we own. There are lots of unknowns on the speed of channelling policy stimuli into the economy, as well as pandemic relapse risk once lockdown ends which could act as a dampener to any recovery. We don’t expect a return to normal activity levels until 2022.”
Osmani expects China’s economic recovery to act as a blueprint for the rest of the world, given the country entered into recession first. In the first quarter, China activity halted but made a swift recovery and according to Osmani, the US and Europe are following a similar path. However, Osmani said that a spike in global unemployment rates would pose a big threat to the whole recovery.
Osmani added: “While we expect a gradual recovery, there remains the potential downside impact of any negative feedback loop from the weakening jobs markets on demand. That’s the big threat to the whole recovery and therefore a major forecast risk, and that’s why we have opted for a portfolio focused on resilience.”
Martin Currie currently favours companies with high management quality and strong balance sheets and cash flows operating in industries with high barriers to entry and with strong market share.
