Working through economic recovery scenarios and their impact on any portfolio requires deep thinking of time dimension effects. Talk has focused on the shape of the recession, which is a timing issue. The construction and adjustment of a portfolio will be based on the path of recovery.
At the extreme, a short recession with a quick return to normal suggests holding more risky assets or maintaining the status quo. A damaged economy with a long recovery suggests a more conservative portfolio focused on a near-term cash heavy portfolio. There are a number of in-between paths.
We break timing into three periods. The short-term or immediate will be the reversal of the shelter-in-place lockdown. We are working through the state start-ups right now.
The intermediate will be the more formal restart of businesses. The Lockdown may be lifted but supply chains have to be managed. Production has to resume, and consumers have to spend. Stores have to staff and deal with any residual rules.
The longer-term is associated with the impact on consumer and business behavior. Will firms invest? Will consumers return to their old habits? How will firms and households deal with their debt overhang and adjust balance sheets? If the world has changed, the long-term problem is the behavioral impact of the pandemic.
The speed of adjustment and time within each phase will vary, but the length of any transition will impact the recovery swoosh. The swoosh will require a dynamic portfolio adjustment plan.
One way to support this scenario building activity is to use a dashboard approach. Boston Consulting Group (BCG) in their posting "How Scenarios Can Help Companies Win the COVID-19 Battle" presents a mock-up of what a COVID-19 dashboard may look like. By setting up a tracking system, better inputs can support any decision.
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