Coronavirus: Plan B – Hope for the best, prepare for the worst
The desk interprets the Nordea report as a warning that corporates and economies alike must brace for an extended period of uncertainty due to the ongoing impacts of COVID-19. Per the full note, the analysts highlight that lockdowns have inflicted unprecedented shocks on global GDP, with significant contractions in the US and EU, prompting a rethinking of strategies as firms enter 2021 and 2022. Notably, global GDP is forecast to decline by 3.5% in 2020, underscoring the depth of this crisis. However, leading Nordic corporations are set to face a challenging recovery with profits plummeting by 20% in Q2 and net debt rising 9%, with no imminent return to pre-pandemic conditions in sight. The trading landscape is poised for volatility as investors absorb these developments, particularly in affected sectors like travel and energy.
What the desk is arguing
The desk frames this as a critical juncture for corporates preparing to navigate a precarious economic environment with the potential for a slow recovery. Analysts Johan Trocmé and Viktor Sonebäck at Nordea have raised alarms about a shock unparalleled since the 2008 financial crisis, citing significant GDP declines across major economies during the second quarter of 2020.
According to the report, Chinese GDP fell by 7% in Q1, while the US and EU experienced even more pronounced downturns of 9% and 14%, respectively, in Q2. As such, 2020 is now set for a 3.5% fall in global GDP, reflecting a contraction that expects to reshape economic strategies going forward.
Where it sits in our coverage
Currently, our internal consensus target for EUR/USD stands at 1.075, with a range from 1.04 to 1.12. Notable firms with differing forecasts include - jpmorgan: 1.10 for Mar26 - bofa: 1.04 for Mar26.
The desk's outlook aligns closely with jpmorgan, which concurs with expectations of prolonged market volatility, particularly given the emerging trends highlighted by the Nordea commentary. This positions our forecast towards the higher end of the consensus spectrum.
How other firms see it
Firms like jpmorgan support a cautiously optimistic view regarding recovery, while bofa is more bearish, anticipating weaker performance from corporates through 2022. This divergence reflects broader market sentiments around the sustainability of corporate earnings and economic stability post-COVID-19.
Market participants are encouraged to monitor related pairs such as USD/SEK and corporate earnings reports, which could reflect the real economic impacts articulated by Nordea. As firms grapple with growing debts and declining revenues, the interplay of currency fluctuations will likely be pronounced.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01COVID-19 has caused unprecedented economic disruptions worldwide.
- 02Global GDP is forecast to decline by 3.5% in 2020, exceeding previous economic downturns.
- 03Nordic corporations face significant profit losses and increased debt levels.
- 04The outlook for 2021 and 2022 remains uncertain with potential long-term sectoral impacts.
Market implications
Traders should focus on the immediate implications of corporates' debt levels and the potential for volatility in affected sectors. Precise levels to watch include 1.075 in EUR/USD as a pivot point, while upcoming earnings reports could provide insight into how companies are adapting to these challenges.
Risks to this view
A rapid and widespread rollout of effective vaccines or unexpected fiscal stimulus measures could drastically alter the current outlook, creating sharp divergences from the anticipated patterns of recovery outlined in Nordea's report. Furthermore, sustained declines in consumer demand could inhibit any recovery efforts.
Nordea On Your Mind Coronavirus: Plan B – Hope for the best, prepare for the worst 21-09-2020 Covid-19 has given an unprecedented shock to the world economy, as lockdowns caused sudden and sharp declines in demand, and we cannot safely assume that development of a vaccine or other therapy will make it go away entirely. In the latest report from our Nordea Thematics team, we are exploring how well corporates are equipped to face a more challenging 2021 and 2022 if consensus forecasts are too optimistic, and if there is a need for a contingency plan. Nordea On Your Mind report: 'Coronavirus: Plan B' In the latest Nordea On Your Mind report ‘Coronavirus: Plan B’, Johan Trocmé and Viktor Sonebäck explore the economic shock unlike any other.
There are some winners from the pandemic, like online retail and healthcare, but others, such as travel, hospitality and oil, could see a permanent negative impact. Corporates should carefully consider what they are prepared for in a very uncertain outlook. A shock without equal The COVID-19 pandemic has hit the world economy harder and more abruptly than even the global financial crisis of 2008-09.
Lockdowns to slow the spread of the virus kept consumers stuck in their homes and made Chinese GDP growth plunge to -7% in Q1, with the US and the EU facing -9% and -14%, respectively, in Q2. Net global GDP is now set to fall 3.5% in 2020. Listed Nordic large corporates saw 20% of their top line vanish in Q2, with EBITDA down 27% and net debt rising 9%.
It would have been even worse without unprecedented state and central bank support, such as subsidised temporary staff layoffs, deferred tax payments and loan guarantees. No quick fix for COVID-19 In the absence of an effective vaccine or universal therapy, governments arguably have no choice but to enforce social distancing to slow the spread of the virus and avoid overwhelming healthcare systems with too many patients requiring intensive care. Such measures have been eased in recent months, but could be reintroduced in response to any resurgence of the virus.
We believe a vaccine will be approved for use in three to six months and that it will likely offer effective immunity for one to two years, which should be sufficient to effectively end the pandemic. But the ramp-up of vaccine production, distribution and actual vaccinations – until a large enough share of the global population is immune – will take time. The WHO expects it could take two years before the pandemic is declared over, while consumer and business confidence could start to improve earlier.
Massive central bank stimulus has undeniably buoyed capital markets, but we think corporates should have a long, hard think about what they dare to expect from the economy in 2021 and beyond. Johan Trocmé, Director of Nordea Thematics Markets expect a return to normal in 2021 – do you? Remarkably, equity indices and credit spreads have recovered to pre-crisis levels despite dire macroeconomic news flow and corporate earnings momentum.
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