Bain: The COVID-19 outlook is consistent with a ‘two-to-three-quarter recession’
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Companies globally still face a material threat from the COVID-19 fallout, according to modeling by Bain.
The consulting firm’s Macro Trends Group has modeled what it calls a Situational Threat Report (SITREP) Index, based on a composite group of inputs comprising epidemiological developments, as well as social and economic conditions.
The Index operates on a zero to 10 scale, where zero is “all clear” and 10 is “severe global recessionary conditions lasting for a prolonged period”.
As of last week, the SITREP Index returned a reading of seven — defined as “severe multi-quarter economic impacts in multiple markets likely”.
The index has been sitting at seven since mid-April, when Bain’s macro forecasters increased it from level six.
While level seven stops short of widespread solvency risk and business failures, the current situation means companies will need to ensure their business models are robust enough to see out more turbulence in 2020.
As part of their contingency plans, Bain said companies need to narrow their focus to serve high-priority clients.
They will also need to implement “operational and financial preparations consistent with a two-to-three-quarter recession”.
While that analysis is consistent with forecasts for an economic contraction through to the end of the year, stock markets so far appear to be looking further out than that in assessing fair value.
April’s record rally in the wake of the March selloff has so far been consolidated in May.
At his annual shareholder conference earlier this month, investor Warren Buffett used a train analogy to compare the COVID-19 pandemic with the 2008 global financial crisis (GFC).
The GFC was caused by the US “economic train” going off the tracks, Buffett said. But in response to the coronavirus, “we just pulled the train off the tracks and put it on a siding”.
In effect, markets are still betting that listed companies will navigate the external setback, and benefit once the economic train gets back on track.
Bain’s SITREP Index is updated with real-time data to assess risk based on a continuum of events.
To gauge economic and social conditions in the wake of the crisis, the firm’s Macro Trends group says it uses a combination of “high-frequency anecdotal reports and more conventional macroeconomic data”, along with unconventional sources such as social media which are discounted for their relative level of credibility.