Sudden stop, permanent scars

Highlights:

• The coronavirus has caused a sudden stop of the global economy. The recession will be deep; it will hopefully be short-lived, but a V-shape recovery is in doubt, as second-round effects will kick in (depressed capex, weaker con-sumer confidence etc.).
• Expect long-term scars: the social and economic fabric will change semi-permanently. The supply chains may be-come less global, more regional. The demand for health security and a tighter social net will rise. Interventionism is al-ready growing, which in time may well hurt potential growth.
• Thankfully the policy response has been powerful. The soothing effect on global markets is already apparent. But sol-idarity is stil l missing in Europe. The risk for Euro Area (EA) stability is not so much for 2020, as large ECB buying will mostly cover the new funding needs. But if Europe wants to protect its long-term stability, it must act early.
• We recommend a cautious re-risking of portfolios. Equities offer value longer-term, but remain exposed to growth and earnings downgrades in the near term. Keep the overweight (OW) small for now, via defensive sectors and stocks.
• Our biggest OW is in IG Credit, on evidence that policy makers are showing a preference for creditors over share-holders.

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