Following an unprecedented month on markets, fund manager T.Rowe Price has outlined a four-step framework in its appraisal of the near-term outlook.

The group’s head of Australian equities, Randal Jenneke, expects to see “more volatility, but equally new opportunities” as markets reassess fair value amid the crisis fallout.

To assess the unknowable question of when the crisis will be contained, T.Rowe Price categorised the answer based on containment (the current phase), “hibernation” and “recovery”.

Of those three, hibernation — the continuation of containment until the health crisis is deemed under control — is “the big question and greatest uncertainty for markets” Jenneke said.

At some point between Phase II and III, the recovery will be more entrenched. But the main question for investors is what kind of shape it will take.

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Belief in a “v-shaped” turnaround would make it a less risky proposition to buy stocks now, but Jenneke doesn’t think it will be that simple.

For starters, the current phase “containment” has resulted in a sudden earnings crunch. A number of companies have released downgrades, and many have pulled their earnings outlooks altogether.

But so far, the net result is that the consensus outlook for earnings has only fallen by nine per cent since the market peak.

Jenneke says if history is any guide, that forecast is ” grossly understating the pain”.

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“On average since 1972, the peak to trough fall for earnings in prior recessions has been closer to negative 30 per cent,” he said.

Like other professional investors, Jenneke says pinpointing the exact time for a turnaround is an “impossible target”. Instead, the firm’s analysts are focused on four factors that will determine a return to normalcy.

1. Length of hibernation phase;
2. What types of activity bounce back as containment measures ease;
3. The size and duration of stimulus measures from governments and central banks; and
4. The broader psychological impact on businesses and consumers.

“Expect big earnings downgrades – we all know they’re coming,” Jenneke says. The question is “how will markets react to the magnitude of downgrades some haven’t seen in their lifetime?”

The ability of markets to navigate the firm’s four-step investment outlook will determine whether those downgrades are viewed as temporary rather than permanent.

Jenneke said T.Rowe Price took advantage of the March selloff to increase its sector exposure across IT, healthcare and education technology. It reduced positions in banking and insurance, as well as housing, retail and toll road infrastructure.