The coming recession will only last three months and will end not with a gradual recovery, but with “the biggest ever jump in GDP on a weekly and monthly basis”.
This is according to Richard Woolnough (pictured), manager of the M&G Corporate Bond fund.
Woolnough said this is the most certain recession he has ever seen, due to the noticeable drop-off in daily activity all around us: all discretionary spending has been drastically reduced, with the most expensive type – travel & tourism – cut the most.
However, he said this will also be a completely different recession to those we have seen in the past. Whereas the threat or arrival of a downturn usually follows a typical pattern – whether this is tight financial conditions, the bursting of a bubble, or a dramatic rise in the price of oil – this one will be caused by the order from governments to stop consuming.
As a result, he believes it will be relatively easy to predict the end of the coming downturn.
“Recessions are usually described as V- or U-shaped,” the manager explained. “The first leg of this recession will resemble the U-shaped form.
“It will be vertical and dramatic, and the largest ever collapse in GDP on a weekly and monthly basis in many countries.
“Given that the recession’s speed and depth is due to the virus and resultant government action to prevent us mingling, we have an unusually strong idea of when and how the recession ends.”
Woolnough pointed out the virus appears to exhibit seasonal patterns like influenza and, once it has made its way through the population, immunity can build up. Therefore at some point, presumably within three months, government policy will be changed and we should be able to return to normal behaviour.
The manager said the resulting bounce-back will be enormous.
“Thus, economic data will show a rapid rebound: it will not be a V or a U, rather it will look like an l,” he continued.
“It will be the biggest ever jump in GDP on a weekly and monthly basis in many countries.”
However, the manager warned that the dramatic collapse and recovery will cause some longer-term damage to the economic system: first from an overall business and personal confidence level, and second due to the unprecedented nature of the severe short-term pain of the recession.
As a result, human behaviour may change and vulnerable companies relying on short-term discretionary spending will have been weakened and may suffer permanent harm.
Woolnough noted that while some consumption will just be deferred (such as buying a car), much will be lost (such as going to the cinema).
“On the positive side, unlike most other recessions, developed economies exhibit very low unemployment and considerable numbers of the population will remain employed and many businesses can remain stable,” he continued.
“Hopefully there will be fiscal support for those who struggle more.
“Therefore, post-recession growth will return to normal, but initially will be unlikely to regain its previous levels.
“This makes this type of recession t-shaped: a sharp pull-down, a sharp rebound and then back to the normal economic cycle, at probably a lower level than before unless the policy response overwhelms the downdraft, in which case we return to where we were before (T, not t). For the economies most affected, this ‘t’ will be a larger downdraft and bounce back, though the permanent damage may be more.”
In terms of the impact on corporate bond investors, the manager said it is important as always to differentiate between credit qualities. For example, while high-yield defaults can be expected to rise (previous recessions have seen up to 30 per cent of high-yield companies defaulting over five years), investment grade companies should survive (with closer to 2 per cent of companies defaulting over five years in times of stress).
Data from FE Analytics shows M&G Corporate Bond has made 129.94 per cent since Woolnough joined the fund at the start of March 2004, compared with 90.01 per cent from the IA Sterling Corporate Bond sector.
Performance of fund vs sector under manager
Source: FE Analytics
The £3.5bn fund is yielding 2.79 per cent and has ongoing charges of 0.59 per cent.
Woolnough finished by reiterating his main point.
“This recession is different,” he said. “We know why it is happening, have a far clearer idea than usual of its length and can strongly postulate how it comes to an end.
“Different governments and central banks are therefore working on measures to get us through the short-term GDP flash crash. This has allowed the authorities to act in a bold and aggressive manner that is in itself different.
“This unprecedented stimulation is likely to stay in place post the shock, to ensure that the economy has a chance to get to an economic level as near as possible to its previous level.”
However, while not referencing Woolnough specifically, Tollymore managing partner Mark Walker warned investors to take any predictions about the length of the recession or bear market with a pinch of salt.
“Throughout my institutional investment experience I have seen time and time again predictions about the future which were consistently and often significantly wrong,” he said.
“We can make no clear conclusions on how much further markets may decline. We do know that this panic will subside but don’t know if it will accelerate before it subsides.
“Anyone claiming the ability to be able to predict the future in this field has self-awareness issues.”