L, U or V - What Shape Will The Recovery Take?

April 7, 2020

‘It has long been my feeling that the lessons of economics that reside in economic history are important and that history provides an interesting and even fascinating window on economic knowledge’ – JK Galbraith

The great challenge facing all market participants is to assess whether we have found a floor, have further to fall and what shape the recovery might take.

Will the global economy experience a protracted depression (L shape)? Will the unprecedented stimulus packages enable economies to limit the impact and build a gradual recovery (U)? Or will we see a sharp economic rebound with GDP expanding as swiftly as it contracted (V shape)?


Until the current volatility in markets abates, one can only hypothesise on the eventual shape of the recovery.

For a V shape recovery we would need to see lock-downs lifted, the recently unemployed back in work, a return of confidence, an increase in consumer spending and global trade restarting.

A U shape recovery is on balance the pragmatic view and one currently held by moderate market commentators.

Whilst the market may have priced in the initial impact of COVID-19 and has reacted to the stimulus package, there remains a ‘third wave risk’. Whilst neither a virologist, nor one to doubt the speed and technological prowess of leading scientists and the pharmaceutical industry, there is a risk that we will witness a false dawn during the summer of 2020 where governments proclaim that the curve has flattened. This is reminiscent of the 1918 influenza outbreak in St Louis, Missouri. Local government had managed to suppress the first and second waves of the virus through very similar measures to those we are witnessing today (masks were worn, businesses were closed) only for the virus to then rear its head a third time in the early spring of 1919 by which time the restrictions had long been lifted.

Would Governments in the US, UK and Europe have the political capital, financial resources and willingness to impose the restrictions and provide further stimulus adding yet more debt to the mountain? Perhaps China has the structure, control and technology to do so and it would be poetic if Asia were to lead the way out of the crisis.

If you have read Michael Lewis’s recent history ‘The Fifth Risk’, then you may doubt as I do that the US has the ability, resources or leadership to manage a scenario of multiple waves.

The most bearish view foresees an L shape ‘recovery’. The Great Depression that followed the crash in 1929 lasted more than 10 years, with unemployment remaining above 10% throughout the decade. We would not anticipate it being as bad as that, but one of the features we have already seen is an unparalleled spike in US unemployment with over 6.65m now out of work.


The spectre of inflation (2.3% in the US at the time of writing) is another feature that has not yet shown itself in the economic data. The next published rate is due for release from the US Labor Department on the 10th April.

As an investment team we debate the ever changing dynamics constantly and now conduct our 8.45am start of day meetings remotely as a consequence of the lock-down. These conversations utilise a wide range of quantitative and qualitative research, which contributes to our collective knowledge of the rapidly shifting economic landscape.

This process of discovery enables us to establish a view from which purposeful investment decisions can be made in the best interests of preserving and growing the capital of our clients, both in the near-term and for the longer term investment horizon.

It is at times like these that clients can take comfort in knowing that they have an experienced discretionary management team with diverse views and the acumen to chart a course through the most volatile of markets.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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