How to plan for the future in uncertain times

No one has a crystal ball which can tell us what our recovery trajectory will be. But experts have suggested a few possible scenarios.

The "classic" real economy shock - a displacement of output, but growth eventually rebounds. In this scenario, annual growth rates are able to fully absorb the dip.

Source: BCG Center for Macroeconomics analysis

The ugly sibling of V - the shock persists, and while the initial growth path is resumed, there is some permanent loss of output. A plausible scenario.

Source: BCG Center for Macroeconomics analysis

This is a highly unlikely scenario unless COVID-19 does significant structural damage to the economy's supply side: the labour market, capital formation or the productivity function.

Source: BCG Center for Macroeconomics analysis

HSBC Global Asset Management is of the view² that we will most likely experience a "swoosh" type recovery. This would feature a sharp rebound in the near-term, followed by a more gradual recovery over time.

Meanwhile, in the International Monetary Fund's June³ World Economic Outlook, the global body projected a deeper recession in 2020 and a slower recovery in 2021 compared to their April forecast. This pessimism reflects the worse than anticipated outcomes in the first half of 2020. It shows an expectation of more persistent social distancing, and damage to supply potential.

(Global real GDP growth, 2020 year-on-year percentage change)

Source: IMF, World Economic Outlook

To prevent the global economy from falling off a cliff as a result of COVID-19, policymakers and central banks around the world have been pulling out almost all the stops in monetary and fiscal responses. Their hope is to prevent this crisis from turning into a lasting depression.⁴

Record low interest rates will help our economy rebound and recover, and some experts believe we'll see even lower interest rates for longer.⁸ Because income from savings interest will stay low for the foreseeable future, as an investor you should consider other options (such as equities) to build your wealth.⁹

There is no perfect answer. But using learnings from previous crises like the Asian Financial Crisis and the Global Financial Crisis, here are some ideas:

Businesses which are less sensitive to the business cycle are more likely to prosper as households and businesses differentiate between what they want and what they need.¹⁰

Good, coherent government and a well-run civil service will tend to encourage a faster return to confidence, which will help businesses return to normality quicker.¹¹

Gold is often referred to as a safe haven investment, especially in times of crisis when it normally holds its value or increases.¹² Apart from providing diversification from equities and bonds, gold may also be a good option with the decline in interest rates.¹²

A crisis can often break down barriers to change and allow new disruptive players to emerge.¹² COVID-19 has contributed to the rise in automation and onshoring of production, increased adoption of technology and an overall move to a much more virtual world.¹²

If you're not getting optimal returns from your savings during the recovery, perhaps it's time to take a new look at your investment strategy.

Your Relationship Manager can offer assistance and walk you through other alternatives to grow your wealth, whether it's unit trusts, bonds/sukuk or structured investments.

Sources:

¹Harvard Business Review, What coronavirus could mean for the global economy, 3 March 2020.

²HSBC Global Asset Management, Global Investment Strategy, July 2020.

³International Monetary Fund, Reopening from the Great Lockdown: Uneven and uncertain recovery, 24 June 2020.

⁴Pimco, From hurting to healing, 1 April 2020.

⁵Investing.com, Central Banks.

⁶South China Morning Post, Hong Kong cuts interest rates after US Fed's surprise move to bolster sagging economy as coronavirus outbreak spreads worldwide, 4 March 2020.

⁷The Edge Markets, BNM rate cut hints of a higher vulnerability, 8 July 2020. 8. Pimco, Post-pandemic interest rates: lower for longer, 13 April 2020.

⁸Pimco, Post-pandemic interest rates: lower for longer, 13 April 2020.

⁹Lowy Institute, After coronavirus: Where the world economy will stand, 26 March 2020.

¹⁰Perpetual, Investing in the time of COVID-19, 29 April 2020.

¹¹Schroders, Eight lessons from previous crises that apply today, 2 June 2020.

¹²The Times UK, Coronavirus: How to protect your investment portfolio, 23 June 2020.