Let's dance

Around the world, countries are starting to ease their lockdowns. The draconian phase of the fight against coronavirus – the Hammer – is ending. The Dance is beginning.

The Hammer was brutally simple. It stopped the virus in its tracks, but did the same to the economy. Almost every country (eventually) followed the same approach, with the same results.

The Dance (where regulations are slowly eased and people begin going back to work, schools open again, and social life resumes) is more complex. Different countries are taking different approaches depending on political, medical and economic considerations. We all locked down in much the same way, but opening up everyone will be dancing to their different national anthems.

The countries and regions below account for nearly two thirds of the global economy, so their progress will be crucial in the next few months. We see encouraging signs of growth, but are not yet confident enough to extrapolate that into a V-shaped recovery.

In portfolio terms, we think markets have become too optimistic on the V. We do not feel compelled to chase the rally in equities, preferring to look for opportunities in credit markets, which are more attractively priced.

UK –Starting to Dance, but a nervous Prime Minister makes it hard.

Coming into 2020, the UK was one of the more challenged developed economies, after years of political uncertainty. Quick and decisive action by the government – the furlough scheme, the loans, the bailouts – means that a lot of damage has been avoided and that the bulk of pre-COVID consumer demand should have been preserved. Indeed the number of insolvencies in the first quarter was lower than in normal years.

Now Boris Johnson is nervous about exiting lockdown in England, and it shows. Leadership and communication are most important when there are shades of grey – the population need to be confident that the government has a plan. Boris Johnson hasn’t been giving that impression and people are losing faith. The Prime Minister does not want a second wave of the virus, partly for public health reasons, partly because it’s not clear that the population will go back into lockdown if he orders it.

As England returns to normality and the rest of the UK remains in lockdown, old political issues are being given new life by the virus. Scottish independence is back in the headlines; travel to and from Ireland is becoming a tricky issue once more, and Brexit is rearing its head again. Once the Dance is over the UK will still have a difficult road ahead.

US –Unwilling to stay off the dancefloor, even if it costs lives.

In the US, the state governments control the Dance and only nine states are seeing COVID-19 cases still rising. Cases are actually declining in half of them. State politics is essentially a local affair and many governors are giving in to the pressure to unlock their communities, regardless of the health impacts.

This may be why Americans are already feeling more positive. Airbnb is reporting an accelerating number of bookings, and Mastercard data show spending habits starting to return to normal.

But the rise in unemployment over the past few months has been scary, and employers will need to see evidence of a sustained recovery before they begin hiring again – the recovery is likely to be a grind, not a bounce.

It’s important to remember, though, that hire-and-fire applies during the recovery as well as the recession. If things do start getting back to normal, the US is the economy most geared up to take advantage of a global bounce in growth – e.g. if a vaccine is discovered.

Europe – The stage is set for a co-ordinated Dance routine.

Italy is opening restaurants and hairdressers, Belgium is opening museums and zoos, while France is opening some schools. Cafes are opening in Portugal, and perhaps most tellingly, Germany has opened its auto showrooms.

German GDP fell by just 2.2% in the first quarter – half the decline of France, Spain and Italy. Germany – an economy based on global trade, the manufacturing cycle, and China – may not sound like a potential winner in 2020, but is far better placed than some of its neighbours. France, Spain and Italy all rely on tourism for more than 10% of GDP, and that demand has fallen to zero.

For once, the Eurozone isn’t facing an economic crisis of its own making. This isn’t Greece borrowing too much money, or an Italian banking issue. COVID-19 is a common enemy, and requires a communal response. This is starting to happen with France and Germany close to agreeing a half trillion euro bailout plan – funded by commonly-issued debt.

If the crisis is resolved quickly and this plan goes ahead, this could be the moment when the Eurozone decided to give unity a try. The FT editorial board has compared it to the moment when the founding fathers of the US decided to assume state debts. Could COVID-19 be the first economic crisis where the Eurozone exits in a stronger position than it entered?

China – First on the dancefloor, no missteps so far.

China started allowing non-essential retail stores to open before the end of March, and has been dancing for nearly two months now. So far, things appear to be going well, and there are some lessons to be learnt.

Economically, things are bouncing back. Vehicle sales rose by 60% in April, with oil demand up by a quarter. Pollution levels are back to their uncomfortably high levels. And the Chinese government is set to announce more stimulus on Friday, on top of the 15% of GDP we’ve seen already.

Meanwhile, the province surrounding Shulan, one of the cities near the Russian border, has been put back into lockdown – over 100 million people. Schools have closed again, and people are only allowed to leave their homes every other day for essentials. Targeted tightening of restrictions is a key part of the Dance which will hopefully prevent the need for a second phase of the Hammer across wider China.

This is the first real test of the Dance approach, so we’re watching closely.