Two Visions Of The Future

Two Visions Of The Future

almost 4 years ago2 mins

The CEO of major investment manager Oaktree Capital set out two visions of the pandemic-pummeled economy’s future in a letter to clients on Tuesday – and tips from Bloomberg News on Wednesday may help Finimizers figure out which looks more likely 🔮

What does this mean?

If the coronavirus is curbed within three months and financial rescue plans work as intended, the optimistic outlook is a “V-shaped” economic dip. One forecaster sees US company profits declining by a third this year – only to rise 55% in 2021, with stock prices climbing accordingly.

But cases could get out of control Stateside – with the economic effects amplified by a low oil price. Unemployment could balloon above 10%, with quarterly growth down 30% on 2019 and many indebted companies (and investments) collapsing. And that’s without a second wave of infections… 😷

Oaktree’s boss also fears investments will fall further if this view proves correct
Oaktree’s boss also fears investments will fall further if this view proves correct

Which brings us to Bloomberg’s “Five Ps”: gauges which may provide clues to when the market’s true bottom is reached. One obvious focus is Pandemic – the rate at which coronavirus cases grow. But then there’s Policies: despite further interest rates cuts this week, China’s economic response may need to go further.

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Why should I care?

Two other Ps are particularly pertinent: Positioning and Pricing. Looking at Asian emerging markets in particular, investor withdrawals from stocks are still only 44% what they were during the last financial crisis. And the US stock market has only fallen just over half as much as it did then… 🤔

Perhaps most prominent of all at present, however, is Production. Chinese manufacturing may have rebounded last month – but some worry fresh outbreaks could stop the world getting fully back to business anytime soon.

The reality may be U-shaped – or even an L
The reality may be U-shaped – or even an L

In that case, Oaktree’s CEO fears governments’ and central banks’ existing economic bailouts may not be enough. And absent any actual production of goods and services, printing money to pay people’s wages and buy government bonds could risk soaring inflation. Check out our Economic Theories Pack for more on that...

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