Are we heading for a U-bend recovery?

October 2, 2020

Are we heading for a U-bend recovery?

While the market has debated whether we are facing a ‘V’ or ‘W’-shaped recovery, we believe a U-bend shaped recovery is more likely.

There are a few reasons why we think economies will not return to the same pattern in which they were before the pandemic in just two years. This is about more than the Covid-19 virus alone, and has its roots in the leverage-distorted system which was in place prior to the pandemic, which helped to create untenable wealth inequality which, in turn, fueled populism and a reversal of the globalization trend.

As always with a crisis, there are reasons why previous trends are accelerated and new trends emerge. The global financial crisis was a good example: economies weakened and then recovered, political parties changed, and some other pre-existing trends accelerated while new ones came into force. The rise of social media, smartphones and technology continued after the crisis, probably helped in part by the low cost of finance and the abundant availability of venture capital. The banking system, however, had to restructure by shrinking balance sheets and reducing staff.

Significant economic turmoil always leads to a change in political parties as new leaders suggest they can do better than their predecessors, and a disillusioned electorate looks for change. The long-term trend of globalization was also a casualty of the global financial crisis; the current calls to bring jobs home and rising trade tensions are a symptom of this. Against this backdrop, the recent pattern of US unemployment claims is a good example of the view that economic data (having bounced from the lows of the March/April lockdown periods) will take a while to get back to pre-crisis levels.

Paul Brain, head of fixed income, Newton Investment Management

All investments involve risk, including the possible loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

Charts are provided for illustrative purposes and are not indicative of the past or future performance of any BNY Mellon Investment Management product.

"Newton" and/or the "Newton Investment Management" brand refers to Newton Investment Management Limited. Newton is incorporated in the United Kingdom (Registered in England no. 1371973) and is authorized and regulated by the Financial Conduct Authority in the conduct of investment business. Newton is a subsidiary of The Bank of New York Mellon Corporation. Newton is registered with the SEC in the United States of America as an investment adviser under the Investment Advisers Act of 1940. Newton's investment business is described in Form ADV, Part 1 and 2, which can be obtained from the website or obtained upon request.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the corporation as a whole or its various subsidiaries generally.

This material has been distributed for informational purposes only. It is educational in nature and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

Views expressed are those of the author stated and do not reflect views of the other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Certain information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Investors should consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Newton and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon.

Not FDIC-Insured | No Bank Guarantee | May Lose Value