New approaches to the Macroeconomic Climate & Portfolio

Macroeconomic-Climate

The macroeconomic climate is changing and has investment implications.

Once we get into the current context, we’re going to talk a little bit about where we were before the Covid-19 pandemic and work our way through today’s facts and problems and what that means moving forward.

Before the Pandemic at Covid-19

Until the pandemic we were in a position where all three of our key points of equilibrium pointed to less upside and greater risk for asset prices.

  1. Interest rates in the developing world couldn’t be much lowered. This was a headwind to growth and a challenge to asset prices as this conventional offset is not available if there’s a shock. The US had room for about 150bps, which was wholly inadequate (and no room in the other major developed economies). The average recession alone needs an easing of about 500bps to rectify revenue, consumption, and debt imbalances.
  2. We were also at a time when labor markets were relatively stable, suggesting a high utilization of economic resources. Growth has probably not gotten much better. Central banks were reluctant to loosen their policies, and very small.
  3. Prices of assets went higher, compressing their returns downwards. The stock risk premium over bonds and cash had been small. In absolute terms (not only in relative terms) the rates on cash and bonds were already low.

We were in an environment where we will have sluggish growth , low inflation, zero or near zero interest rates going forward, but plenty of liquidity to support asset prices.

Since traditional forms of monetary policy were more or less maxed out, that shifted more from dependence to fiscal policy.

In a downturn, central banks will need to work with fiscal policymakers in order to get the sort of results they need. You may think of it as essentially a growing monetary and fiscal policy. If anyone refers to “MMT,” this is essentially what they say in some way.

A decline would check how truly ready they were. The collapse that took place was abrupt and worse than anyone could have expected. When markets rise and volatility is low, the leverage builds up in the system as the return becomes more important to investors than the risk associated with price movement and market losses mark-t0.

The massive drop in revenue and spending as the aggregate market was positioned for improved conditions triggered the most violent sell-off in history. Those who sold OTM or far-off OTM derivatives had to hedge these bets quickly and many investors sold out as a result of cash flow issues rather than fundamental ones.

New approaches to the Macroeconomic Climate & Portfolio

Turning to the latest macroeconomic context

The primary form of monetary policy (driven by short-term interest rates) was brought down to their floor when the sell-off struck. Once those reach zero or slightly below, they don’t work to push more money and credit into the system because the profit margin of lenders is eroded.

The secondary form of monetary policy (acquisition of assets, also known as quantitative easing, or QE) has more or less executed its course. Long-term rates in all major reserve currency countries (US, developed Europe, Japan) are now also down around zero per cent. Once that spread is gone, for the same reason it stops functioning well.

So, both of the policies of which we have become accustomed since the financial crisis of 2008 have reached the end of their useful lives.

That means that even before the Covid-19 crisis, markets and the economy faced a policy asymmetry. Policymakers could downgrade the rate structure a bit but not much.

If the effective equity period is about 20 and you have 150bps of easing available along the curve (as was the case in the US), this is around 30 percent worth of returns that you can bring forward. But if there’s a big revenue, expenditure, and/or credit shock, that’s not enough to offset the dip.

This was the 10-year trend into the 2008 market recovery. Working off a bad debt overhang takes a really long time. Markets were roiled in 1937, eight years after the start of the downturn, when the Fed tried to raise rates off the zero-bound. They did the same for the same causal-effect relationships in late 2018, more than ten years after the start of the downturn.

That political asymmetry is even truer now. That means there is practically no limit on the extent central banks might tighten, but the ability to ease and reverse a downturn was very limited.

And because the Covid-19 pandemic blew such a big hole in income and expenditure, we ‘re very unlikely to see much of the way in inflation or any pre-emptive tightening up. The pandemic increased the burdens of global debt, while also reducing income. This also means that the world is more sensitive to higher interest rates with a higher debt stock versus a lower output level ( i.e., lower income for servicing more debt).

The new dynamics of main

The best way to look at the pandemic-related decline is by providing three basic overarching features.

  1. There was a global earnings shock from the pandemic that shut down significant sections of business operations.
  2. Short-term interest rates stood at zero.
  3. Long-term interest rates remained at zero, too. (This decreases borrowers’ opportunities to lend when there is little or no spread or catch that does not outweigh the risk.)

This scenario involves a fiscal policy that is accompanied by a monetary policy that includes the tertiary types we discussed in other things.

This is a policy format that resembles a common coordination that is not typical of all countries, and is not available. To reserve currency nations, it is more competitive, and less available to those without reserve currencies.

We see this with the Covid-19 pandemic recovery with more fiscal juice spent on developed markets than on emerging ones.

The collapse in income has brought about a collapse in expenditure, which in a self-reinforcing way reinforces the drop in revenue.

In normal times, that is a difficult thing to get out of. This becomes much more complicated because there is no usual way of getting out of it (i.e., a spike in short-term interest rates).

The downside for the economy and markets is much greater without the normal offsetting force of a fall in interest rates and the positive wealth effects that it creates.

The absence of that interest rate stabiliser destroys the protective net in the US that had been around for decades.

That is what made 2008 terrible for the US economy and markets, and what made the 2020 Covid-19 crisis hit as hard as it did when the debt overhang was still high and a massive amount of income and investment was wiped out by the nature of the crisis.

The extent of the fiscal and monetary response was adequate to fill the gap in revenues and expenditures generated in the US.

The dilemma is that the paths to maintaining income and spending for that revenue and credit are not guaranteed.

I assume the greatest risk is a time gap between how long income and expenditure are affected between relation to the quantity and duration of the fiscal and monetary response.

When there’s a major drop in income and expenditure and it’s not balanced by the fiscal and monetary answer, that is a huge potential risk as it’s a self-reinforcing cycle that’s really hard to break out of, as stated.

What’s most important is to look at the fundamentals of what’s going on in the economy, how it’s affecting the markets, and the subsequent policy response and what’s going to be expected to work with that policy response.

The Mechanik

Many different transactions form an economy. A contract has two sides: a buyer, and a seller.

The buyer is an individual that spends its money on the seller, who then takes the money and invests it.

It will feed off itself when this gets going. Transactions pick up , people become more creditworthy, they can borrow more, which in a self-perpetuating loop increases lending, which increases investment, the value of assets, which makes them more creditworthy.

Spending needs a cash source. And the investment provides other citizens with money and it works both directions.

So, we can think of it from the perspective of “sources and uses.”

You have three sources of funds at baseline level:

– Currency
– Lending
– Earnings

You have three basic uses of the funds:

– Expenditure
– Savings (also known as reservations)
– Buying Financial Capital

M + C + I = S plus R + F

(Money) (Credit) (Entertainment) (Reserves) (Financial assets)

Every category on its own side of the equation or that on the other side will flow into another category. Although the sources are needed to provide the uses, the uses must provide sources ( e.g., revenues).

For example, when the central bank buys financial assets, that pushes more capital, credit, and income into other types of financial assets that then generate income over time, that can then go into spending, cash reserves, or additional financial asset purchases.

In the real economy, the main process of strengthening is when one person spends income generating. That is then a source to go spend and build the self-perpetuating loop for an economic system for that individual.

Recessions usually arise as a result of tightening monetary policy triggered by interest-rate rises. Costs of debt servicing increase and eventually swamp the available cash flow to service it.

Under the sources and uses framework, this causes a decrease in borrowing (i.e., credit) when you get a rise in interest rates. The reduction in credit then includes a decrease in spending on the equation’s uses hand. This may mean either less spending in the real economy ( i.e. on goods and services) or fewer sales of financial assets.

This downturn is unique in that it was caused by large income drops. Most citizens – in the United States alone around 40 million – quit working as business was forced to be cut down or entirely quit in the interests of public health and safety. The reduction in labor has not been brought about by a tightening of monetary policy and a lowering of credit production as normal. There was also no deleveraging that triggered it, which is what triggered the shocks in 2008 because it was not enough to bring enough liquidity and credit into the economy as it usually is to lower the short-term levels to zero.

The truth is revenue has actually fallen. So as income dropped, expenditures dropped in tandem with one another, feeding off and making it unique.

Fiscal and monetary position

We’ve covered funding sources and uses, but it’s also important to cover the two main levers of how to jump the process (monetary and fiscal policy). Although the downturn in economic activity was sharper than the financial crisis of 2008, and the fall in stocks was steeper than past declines such as 1929 and 2008 (see Appendix at the end of this article).

But because of the faster policy response the depth of the fall in risk assets was shallower.

When enough money is generated and distributed (not necessarily perfect) over the amount of credit being lost, some of it will eventually go into financial asset purchases.

We discuss a couple of the major threats below.

Risk Leader

The primary role of fiscal policy is to replace lost revenue with programs such as unemployment benefits and direct transfers. That’s what matters most. The investment is not being directly replaced. Instead it goes into the category of income.

The government is directly removing the revenue but trying to have indirect consequences by hoping or anticipating it to get into spending.

In step one, the government borrows money from the Treasury to give in the form of revenue to citizens. It also reduces liquidity as the government doesn’t have the funds and the borrowing reduces.

Yet you don’t really know if it’s going to the right places on the performance line. Is it going to the people who need it, and how and in what amounts are they using it? Is it about spending? Bookings for cash? Buying Capital Assets?

According to the calculation of origins and uses, you have the following:

M + C (is earning) + I (higher) = S?) (+ R?) (+ F?)

The government borrows in the expectation it can replace revenue. The money they sent out was approximately the total amount that was lost.

What they want to do is invest their money instead of investing (or using it to reduce debt). Spending allows it to spread and build liquidity to carry the entire economy forward.

It is really the target, in terms of the equation:

M + C + I (above) = S (up) + R + F

The danger is that the outlay will not happen. In other words, the government sends out the checks to get the revenue up, but then they usually save it, put it into financial assets, or pay off debt (credit reduction, C). As they throw off cash, financial assets will raise income a little bit, but only by a fraction, as financial assets last longer. Some of that cash goes back into reserves and new financial asset purchases and not expenditures.

Earnings come up but the government doesn’t get the kind of spending it needs. Typically a little bit less than half goes into spending in terms of the money people get. The rest goes into debt reduction, savings / cash reserves, and financial asset purchases.

The government will tote up how much revenue and spending are missed. But if they simply replace income and only 40-50 percent of that gets into expenditure, that means they need to send $2.00-$2.50 for every $1 in income lost.

There’s also the possibility that this extra liquidity might fuel inflation in the real economy once the economy recovers, thereby reducing real interest rates and getting into the sticky position of having to choose between price stability and production. The credit contraction deflationary forces are huge and will overpower the money development inflationary forces but it is still a possibility. If inflation arises as a result of a deleveraging cycle in reserve currency countries, it usually occurs late due to overuse of stimulant.

But overall, this is the major fiscal-policy risk.

Risk Double

The second issue is that monetary policy by offering liquidity helps fiscal policy and the capital markets. Where central banks have the luxury, they still want to generate the liquidity to save the economy. That’s a long-term risk to currency value, but for now, it’s a divergent subject.

Money production itself does not explicitly generate revenue or expenditure.

The secondary method of monetary policy after short-term interest rates can’t be lowered in conventional quantitative easing (QE), the central bank generates liquidity and instead buys government bonds.

If they need to, if their sovereign debt markets are lacking in size, they may also purchase other securities, moving down the price ladder to corporate investment-grade bonds or diversified equity products like ETFs.

But they are not buying all of the properties. We generally don’t buy inventories, for starters. That is because it does not generally do enough to increase the revenue and expenses. There are, in addition, the distributional impacts. Wealthier individuals own financial assets while the less well-off ones don’t, at least not in about the same sum anywhere.

The selection is therefore not very well designed to simply push QE programs gradually into riskier properties.

So, the government is creating money and moving it into financial asset purchases, especially bonds.

M + C + I = S + R + F (above)

If the government buys bonds, it brings money directly into the pockets of the investors – that is, the individuals who own the bonds, who are mainly shareholders in the private sector.

So how much of that cash goes back into investment, which is the income of someone else, who is capable of bringing the investment into action in the income cycle.

The truth is it’s a small fraction of the QE money that goes into spending.

Thinking about the motives of people, if they own a bond and just sell it because it’s price that went up, what do they do with the money?

They will want to buy something similar to that. And they’re taking the majority of the cash and spending it in something a little bit riskier. That could mean government bonds that have a longer duration. It could mean government-backed agency bonds which yield a bit more. It could become corporate bonds.

Those selling corporate bonds could enter higher-duration or lower-quality corporate bonds, or move into equities. That process continues down the chain all the way.

As these assets’ prices increase and their forward yields fall, this causes the entire “asset yield curve” to drop down as people switch out of higher-risk assets along the risk curve.

That means that the government must actually produce multiple amounts of money and purchase multiple amounts of bonds in order to bring the desired amount of money into spending and profits. It is also a highly uncertain amount because they don’t know exactly what’s going to happen and the shape of the curves involved in elasticity.

You don’t know how much of the government’s money the central bank puts into bonds is going to get into the stock market.

We end up having to produce a lot of resources – even more than it takes to fill in holes in revenue – only to have a portion of it show up in the right locations.

As second- and third-order implications, moving through the financial markets primarily benefits the owners of financial assets, which raises wealth disparities and can spill into social strife, more divisive political movements, cultural division, broader policy results, higher geopolitical threats, and other issues.

Much of it ends up being in cash reserves. Therefore, going indirect with policies such as more aggressive QE generates confusion about how much is reinvested in other assets and how much “leakage” happens as it leaves cash reserves.

Policymakers must weigh the benefits and costs. Indirect policy initiatives such as QE are more strategically attractive and can be implemented by the central bank independently, but tend to have less direct impact.

An alternative path could be something of a program for jobs in the public sector. You saw this through the Works Progress Administration ( WPA) during the 1930s Great Depression era in the US under President Franklin Roosevelt.

The government can borrow the money in the case of the WPA, and hire people to do productive tasks (such as building public infrastructure) that the government is effectively buying. Therefore, the government spends, which generates revenue and provides the form of fiscal stimulus that generates less risks than the type of policy we are actually dealing with.

Yet there are ups and downs. Economic solutions that seek to rectify the problem of spending more explicitly is a tougher road to effectively enforce.

How the virus touches different market players in different ways

The Covid-19 pandemic income shock has varying impacts on the various institutions. Outcome distribution is somewhat different.

What you can do is use fluctuations in the rate of jobs as a proxy for declines in income and look at how this affects the economy’s investment in various types of sectors.

You can then look at how it flows at earnings.

Sectors that have been hit hard, like airlines, travelers or restaurants, are seeing very big impacts.

If unemployment is set at 10 percent, then you see major income declines in certain sectors down to or very close to zero. Things like durable selling goods are in the middle of the pack somewhere. There are far fewer staples such as food, basic medicines, and personal care products.

New approaches to the Macroeconomic Climate & Portfolio

To see the effects, this can be sensitized to 5-20 per cent unemployment rates in increments.

You see up to 85 per cent declines in earnings in some industries with a 10 per cent unemployment rate, but just about 10 per cent declines in others. If you go past that, industries such as airlines and automobile parts can see their earnings almost dry up. Meat, drinks, personal care , and health services are also much less affected.

When it’s overlaid with issues that matter a lot about a company, such as debt, cash reserves, cash flow positions, some businesses fall into insolvency and others don’t get as affected.

This is a basic solution that provides a general understanding of the inequalities in the industry.

One strategy is to go through every public corporation in this world and analyze the cost structures and weakness in their revenue mix. You can then look at payments for debt and debt assets and calculate the effect on revenue, cash flow, and then add up to country level.

It amounts to about a $5 trillion shortfall in revenue in the US and a $21 trillion shortfall in revenue worldwide. It’s about $1.4 trillion in the US on the earnings front, and close to $5 trillion worldwide.

How Global NonFin Companies Fil the Revenue Hole

This is the size of the deficit which the policies need to cover. This is simpler in reserve currency countries, because they borrow in their own currency and can manage them in the normal ways; it is more difficult in emerging market countries with no reserve currencies.

Distribution impact and a stronger portfolio

Even as some business sectors will be affected a lot, to the same degree others will not be affected just as much.

This makes safer, predictable cash flows more important than normal in a world of zero interest rates, where you have the continuous policy asymmetry to economies and markets.

Bonds are no longer so desirable (as a means of liquidity and diversification, though viable). So it may be a fair option to form a bond proxy through a well-diversified equity basket whose underlying companies are products that will still be purchased.

You know that there will always be demand for such daily items like food and all the basics no matter what. The above list indicates which sectors are more dependable than others.

The businesses that market the necessities of daily life have shared with them a very steady road to spend. Accordingly, the companies providing these goods and services tend to have fairly steady streams of earnings. These wouldn’t be the most thrilling investments. But over time they do tend to increase their earnings and provide a little more than bonds.

There would be uncertainty in the cash flows of equities being technically infinite, giving them a longer period. Yet you can get something similar to a bond-like income stream over time by carefully selecting which companies or sector portfolios (i.e., ETFs) to add over time into your portfolio that suits the general bill.

Portfolio of bond proxies

So, if you’re designing a portfolio that could give you a stream of earnings from equities that might look like the coupon on a bond over time, how would you do that?

You know the market’s most stable earnings sources are in three main sectors:

– Forces
– Consumer staples
– Hospitality

Citizens still have to pay for heating, power, heat and so forth with utilities. Consumers need to buy food, personal care products, and essential medication often with staples. Healthcare is an elastic good; people will always have the need to remain functional and safe.

These three sectors show identical volatility rates. And they’re all allocated to common ETFs with a track record that dates back over two decades.

That means that we don’t really have to pick securities and can get broad exposure through the ETF. The businesses that operate at any given point in time shift constantly, and looking at them as a whole and the variety of cash flow sources and output from certain types of companies can be useful.

This also means that through three recessions and big market downturns we can backtest a “stable earnings” portfolio relatively quickly and see how it held up against the broader market.

We can divide the “stable earnings” basket into three equal parts for convenience purposes, and assign services, consumer goods, and healthcare to each for differences in volatilities.

We can then compare this with the S&P 500, the broad benchmark of the market.

Portfolios and Analogy

“Portfolio 1” = Secure receivables basket

Basket “Stable Earnings”

TickerNameAllocation
XLUUtilities Select Sector SPDR ETF33.34%
XLPConsumer Staples Select Sector SPDR ETF33.33%
XLVHealth Care Select Sector SPDR ETF33.33%

“Portfolio 2” = Broad market

TickerNameAllocation
SPYSPDR S&P 500 ETF Trust100.00%

Quality in the Portfolio over time

Over time, we will see higher net returns, and shallower drawdowns. We touched on the importance of defensive stocks in previous articles and their potential over time to produce comparable returns and lower risk for more volatile types of equities.

Quality in the Portfolio over time

Performance of the portfolio per year

New approaches to the Macroeconomic Climate & Portfolio

Equity in Portfolio

PortfolioInitial BalanceFinal BalanceCAGRStdevBest YearWorst YearMax. DrawdownSharpe Ratio
Stable$10,000$45,6717.35%11.14%26.92%-22.42%-33.82%0.53
Market$10,000$36,5156.23%14.92%32.31%-36.81%-50.80%0.36

Drawdowns for Historical Market Stress Periods

Stress PeriodStartEndStable Earnings BasketBroad Market
Dotcom CrashMar 2000Oct 2002-25.82%-44.71%
Subprime CrisisNov 2007Mar 2009-33.82%-50.80%

Drawdowns for Stable Earnings Portfolio

RankStartEndLengthRecovery ByRecovery TimeUnderwater PeriodDrawdown
1Dec 2007Feb 20091 year 3 monthsApr 20112 years 2 months3 years 5 months-33.82%
2Nov 2000Feb 20032 years 4 monthsFeb 20052 years4 years 4 months-27.49%
3Feb 2020Mar 20202 months-14.24%
4Jul 1999Feb 20008 monthsSep 20007 months1 year 3 months-13.89%
5Aug 2016Nov 20164 monthsFeb 20173 months7 months-8.29%
6Dec 2018Dec 20181 monthMar 20193 months4 months-7.43%
7Jun 2007Jul 20072 monthsOct 20073 months5 months-7.14%
8Aug 2015Sep 20152 monthsMar 20166 months8 months-6.84%
9Feb 2018May 20184 monthsJul 20182 months6 months-6.47%
10Jun 2011Sep 20114 monthsNov 20112 months6 months-5.72%

Drawdowns for Broad Market

RankStartEndLengthRecovery ByRecovery TimeUnderwater PeriodDrawdown
1Nov 2007Feb 20091 year 4 monthsMar 20123 years 1 month4 years 5 months-50.80%
2Sep 2000Sep 20022 years 1 monthNov 20064 years 2 months6 years 3 months-44.71%
3Jan 2020Mar 20203 months-19.43%
4Oct 2018Dec 20183 monthsApr 20194 months7 months-13.52%
5Aug 2015Sep 20152 monthsMay 20168 months10 months-8.48%
6Apr 2012May 20122 monthsAug 20123 months5 months-6.63%
7Jan 2000Feb 20002 monthsMar 20001 month3 months-6.43%
8May 2019May 20191 monthJun 20191 month2 months-6.38%
9Feb 2018Mar 20182 monthsJul 20184 months6 months-6.28%
10Jul 1999Sep 19993 monthsOct 19991 month4 months-5.76%
New approaches to the Macroeconomic Climate & Portfolio

Metrics and deeper comparisons

MetricStable earnings basket portfolioBroad market portfolio
Arithmetic Mean (monthly)0.64%0.60%
Arithmetic Mean (annualized)8.02%7.43%
Geometric Mean (monthly)0.59%0.51%
Geometric Mean (annualized)7.35%6.23%
Volatility (monthly)3.21%4.31%
Volatility (annualized)11.14%14.92%
Downside Deviation (monthly)2.20%2.96%
Max. Drawdown-33.82%-50.80%
US Market Correlation0.730.99
Beta(*)0.520.96
Alpha (annualized)3.73%-0.13%
R252.70%97.82%
Sharpe Ratio0.530.36
Sortino Ratio0.760.51
Treynor Ratio (%)11.395.66
Calmar Ratio0.570.52
Active Return0.71%-0.41%
Tracking Error10.62%2.31%
Information Ratio0.07-0.18
Skewness-0.89-0.53
Excess Kurtosis1.711.07
Historical Value-at-Risk (5%)-5.57%-7.89%
Analytical Value-at-Risk (5%)-4.62%-6.49%
Conditional Value-at-Risk (5%)-8.11%-9.88%
Upside Capture Ratio (%)57.8993.72
Downside Capture Ratio (%)45.4495.10
Safe Withdrawal Rate6.02%5.14%
Perpetual Withdrawal Rate4.97%3.96%
Positive Periods158 out of 257 (61.48%)160 out of 257 (62.26%)
Gain/Loss Ratio1.060.86

We can see in a number of ways that the secure earnings basket is outperforming the wider market with higher yields at lower risk.

This may not be the fanciest construction of a portfolio that will have an action-packed journey. Chances of 10- or 100-bagger investments being “exciting” are small.

So it can definitely work over time to get relatively steady through cash flow accumulations. This is especially true at a time when businesses with cyclical cash flows will struggle when central banks have little capacity to ease policy when they need to move forward.

This portfolio structure may help to build a bond-like alternative, or at least an asset class form of hybrid bond-equity if well constructed.

When part of a well-balanced portfolio, this is another investment opportunity to theoretically build out.

Concluding

Throughout this article we discussed the macroeconomic landscape before the Covid-19 pandemic, the current context after it, and how downturn dynamics and fiscal and monetary policy choices impact investment outcomes.

Short-term interest rate adjustment has gone its way (monetary policy 1). Resource purchasing / QE has been running its course (Monetary policy 2). We are now on monetary policy 3 (monetary and fiscal coordination), but traditionally there aren’t all the usual ways that risk assets have had tailwinds.

For corporate margins expected to slip a little with more focus on self-sufficiency (instead of putting production wherever it is cheapest), that’s another limitation on potential valuations.

Policymakers aren’t going to want asset returns to be bad in nominal terms, so I don’t think you’re going to get huge drops if they are able to identify risks and use liquidity where it needs to go. Yet actual returns should be small for the near future.

The biggest problem currently is the output disparity between the markets and the economy. Economic assets can’t be priced more fairly in the long term than the money they give off. Once the production gap has been filled over the U.S. in the next two years or so (somewhat later in most other economies), after that you have 1.5-2.0 per cent y / y productivity growth and not much in the way of labor market growth due to aging populations.

This can have consistency of cash flows of terms of stock market equities, holding services, consumer goods and established healthcare. Of course, companies with high cash yields and healthy balance sheets can also be viable in more cyclical industries ( e.g., oil, materials, industrials, consumer discretionary). Well engineered, such a portfolio can have the same effect as a bond proxy, now that safe bonds are no longer as viable as income sources.

Public markets in general are costly and their actual returns are unlikely to be much this decade. The trend of strong returns in one asset class is normal over time for a period followed by a “missing decade” in the next. One should never extrapolate past results. You may be gradually making the case for private investors to get better yields.

Annex.

Despite the Covid-19 pandemic, the global recession is the worst since the post-World War II era (1945-46).

After 1870, the global economy has undergone 14 major recessions. The global recession related to the Covid-19 pandemic is predicted to be more than twice as severe as the financial crisis of 2008.

World War II: Deepest global economic contraction

World War II: Deepest global economic contraction
(Source: World Bank)

Recessions also have the greatest synchronization since 1870.

In 2020, the highest ever recorded economies will be the ones experiencing contractions in annual per capita gross domestic product ( GDP) since 1870. The share is going to be over 90 per cent.

That is higher than the proportion running from 1930-32 at the height of the Great Depression era.

Economies where per capita GDP contractions

New approaches to the Macroeconomic Climate & Portfolio

2020 has suffered the most severe economic contraction in multiple activity measures

Many global activity indicators are expected to show the sharpest contractions in over six decades by 2020.

A significant portion of the services sector has seen an almost immediate pause in operations. It is attributed to controlled as well as voluntary reductions in human activities to reduce the danger of infection. Partially owing to an ongoing deterioration of infrastructure, world trade and demand for oil will see significant declines in 2020. Additionally, the overall global unemployment rate is likely to rise to its highest level since 1965.

Sales volume for retailers during global recessions

New approaches to the Macroeconomic Climate & Portfolio

The sharpest drop in oil demand ever

Oil demand decreases usually during global downturns. The previous largest decrease in demand for oil occurred during the period 1980-82.

From its peak in 1979, oil consumption fell by a cumulative 9 per cent. The Covid-19 outbreak and the far-reaching steps put in place to slow its advance have triggered a fall in demand for oil which has never been seen historically. The supply-demand was so out of whack at one point that oil prices went down negative.

They also led to a surge in oil stocks, and recorded the steepest one-month decline in oil prices in March.

Carbon use during global recessions

New approaches to the Macroeconomic Climate & Portfolio

The per capita GDP falls in both developing and frontier regions

Although the severity will vary across developing and border areas, existing forecasts suggest that five out of six are expected to fall into recession outright. Within at least 60 years, most developing and frontier regions will experience the lowest rise.

For the first time in a global recession since 1960, they’ll all see declines in regional per capita output.

New approaches to the Macroeconomic Climate & Portfolio
Key:
East Asia and Pacific (EAP)
Europe and Central Asia (ECA)
Latin America and Caribbean (LAC)
Middle East and North Africa (MENA).
South Asia (SAR)
Sub-Saharan Africa (SSA)

The Covid-19 pandemic has contributed to a distinctly unique global recession in many respects. It will be the most serious since the post-World War II era and will cause contractions of GDP per capita in the largest share of economies since 1870. It is also associated with weakening in multiple global activity measures that have seen a dramatic decline, such as services and demand for oil, as well as declines in per capita income in all emerging and frontier economic regions.