The 4 Letters of Economic Recovery… Take a Guess… It’s not A, B, C or D

Amar Pandit , CFA , CFP

The next key question (beyond their own safety and health) on everyone’s mind is when will the economic recovery happen(when will things get back to normal).

In case you have not guessed the correct letters by now, the 4 are L, U, V and W (in alphabetical order). However, the real world would prefer a V anytime followed by U, W and L. 

Let me explain what I mean by each of these letters (in fact these are shapes) in the order of our preferences.

V Shape:

This is when a fast and sharp decline is followed by an equally quick recovery. This is always the best-case scenario in terms of economic recovery and the economy should typically open as quickly as possible for this to happen. Based on how things are progressing (an extension of a lockdown will be announced soon, and no one knows by when the spread of the virus will be contained here in India), the probability of this shape playing out looks very low.

U Shape:

This is when a decline happens, and a bottom formation happens gradually. This normally takes time (could be as long as 1-2 years) and most recessions around the world typically take this shape. If the lockdown increases (which it will), businesses will suffer, and unemployment will rise (reducing consumer spending further putting pressure on businesses). Don’t want to make any predictions here but looks like this is where we are headed.

W Shape:

This is called a Double Dip Recession and typically happens after a V recovery; the economy goes down again and then recovers. Once the economy opens, if an outbreak happens again, this could lead to a further decline and then a recovery (leading to a W shape).  

L Shape:

This is the worst shape of the lot and means that a steep decline and a long stay at the bottom (for 5-10 years). This is unlikely and an extremely low probability scenario. 

Which one it will be and what should you be doing?

The shape depends on how long the economy is locked down for and how fast the virus can be contained (or a cure for the virus found). India is unlikely to go through an L. 

Irrespective of the shape, here is what you should be doing:

  1. Maintain enough liquidity for the next 6-12 months depending on the security of your income or cash-flows. The key is to have enough liquidity for the next 12 months.
  2. If you have never thought of financial planning or taken a holistic view of your finances, this is the time to do it. For those who have done, fantastic. Pat yourself on the back as you are likely to come out stronger once this crisis is over.
  3. Once this is taken care of, the next is to invest regularly through this fall. Like I have mentioned earlier, this is once in a 10-year opportunity (the current one is once in a lifetime till now) and people who have invested in the last couple of weeks have already got abnormal returns. This is an opportunity to buy Low. Aim for Low and Lower (NOT Lowest). The point is not about timing or returns, it is being disciplined about investing in such times.

People who would invest in a disciplined way through this fall, recovery will have sown the seeds of a very strong portfolio in the years to come.

Finally, this is not the time to React but Reflect. 

Do spend some time Reflecting and feel free to reach out in case you have any questions or thoughts.

I would love to hear from you…