Capital markets discount a V-shaped recovery from COVID-19

What is driving the recovery amid ongoing uncertainty about the direction of the Covid-19 pandemic? Our Nordic Equity Strategist Arvid Böhm discusses this and other topics with Viktor Sonebäck of our Thematics Research team. The interview is part of the latest Nordea On Your Mind report, "Coronavirus: Plan B".
Arvid Böhm, Nordic Equity Strategist at Nordea

Arvid Böhm, Nordic Equity Strategist at Nordea

In the latest Nordea On Your Mind report “Coronavirus: Plan B“, Viktor Sonebäck, associate at Nordea Thematics, talked to Nordea’s Nordic Equity Strategist Arvid Böhm (AB) about how Q2 interim reports were typically well received because expectations were lowered prior to their release – and how the ratio of upgrades to downgrades for EPS forecasts has turned positive.

Arvid Böhm elaborates on what kind of recovery is being forecast, and what is actually priced in by markets. We also discuss key factors for several scenarios, such as a vaccine or therapy development, and the potential stickiness of central bank and government stimuli.


Q2 interim reports from listed Nordic companies have given us a first impression of how they have been impacted by COVID-19 and associated lockdowns. How would you summarise the outcomes for the second quarter versus expectations, and how have the quarterly results and the outlook comments given by management been received by investors?

AB: In short, the Q2 reporting season saw profits falling off a cliff. However, as we approached the start of the Q2 earnings season, expectations had been reduced sharply. Calculated against the estimates for Q2 as we entered this year, Nordic adjusted EBIT estimates had been slashed by around 40%; but as it turns out, this was too much. The positive surprise has been massive, with the average EBIT being close to 20% better than expected. The market reaction, however, has been more tempered, and estimate revisions for the remainder of 2020 and 2021 as well. Actually, the market reaction on the day of the report has shown a strong correlation with profit revision for next year (2021), of around 1-1.5% on average.EPS forecast revision ratio for stocks covered by nordea equity research

There has been a lot of discussion among investors regarding the nature of a demand recovery from the COVID-19 shock, with suggestions of a V-shaped, U-shaped or L-shaped trend. What do you think is the consensus view today, and how would you say that it has evolved during the year?

AB: Reviewing movements in different markets such as equities, credits, commodities and FX, a V-shaped recovery would currently be the best description of what is expected in general. The only asset that has not supported this picture is bonds, but to a large extent this can be explained by central bank activities. Macroeconomic forecasters’ outlook would, however, probably still best be described as more of a U-shaped scenario.


Capital markets took a beating during the spring, with tanking equity indices and soaring corporate credit spreads. But capital markets have since recovered strongly. What is your impression of the key drivers behind this? Are investors more confident about underlying fundamentals recovering, or is it more driven by monetary stimuli such as central bank liquidity injections and low policy rates?

AB: I would argue that the key driver has been the extraordinarily large and unprecedentedly quick monetary and fiscal policy response to the economic shock that hit the economy. Furthermore, although it is a pandemic, acknowledging that it is a virus that normally eases both in terms of it spreading and how aggressive it is has calmed concerns. Part of the sharp market correction was also linked to the global lockdown of economies across the world in a synchronized manner. We have had little experience of this before. As lockdowns have started to be eased and government virus containment strategies are now seemingly more selective and concentrated, rather than broad and complete, a recovery from a total standstill could emerge and bolster investors’ confidence.

YTD Total Return For Msci World And Msci Nordic

What do you believe is the most critical data investors are watching for pricing equities? Clinical COVID-19 data, including vaccine and therapy development? Macroeconomic fundamentals? Corporate data? Government and central bank stimulus news? Other?

AB: I believe we are all watching all of these. Two of them, I would argue, are more critical, however. Should a renewed rise in virus spread (which is natural given that mobility restrictions are being eased) trigger governments to re-enter full lockdown strategies once again, I would expect market turmoil to come back. However, I would put a fairly low probability on this happening. The other is a vaccine. The amount of resources being allocated to achieving this is unheard of. We are not there yet, but I have confidence that we will get a vaccine and could possibly be looking at global distribution by the beginning of next year. Should that be the case, then we will be back at square one, before COVID-19 hit – with a few very important differences: pent-up demand, low inventories and massive fiscal and monetary policy in place. As history tells us, there is nothing as permanent as temporary policy measures, suggesting that policy schemes will be retracted with great hesitation.


Ignoring differences between industry sectors and looking broadly, if I asked you to guess the probability of overall demand in the economy again reaching 2019 levels during 2021, what would you say?

AB: Given what I just said, I would argue that the probability of this happening has improved just over the last few months. It currently seems more likely than not. Certainly, renewed lockdown strategies and the world failing to create a potent and safe vaccine would clearly change this for the worse. The rise in unemployment would then risk gaining renewed momentum and larger pools of permanent unemployed being established. The funding sources for public support have been reduced and household savings would accelerate, shaving off the demand that is left even further.


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Read more about the latest issue of Nordea On Your Mind, Coronavirus: Plan B.

If you are a corporate client and want to access the full Nordea On Your Mind report, please contact Viktor Sonebäck, associate at Nordea Thematics.

And don’t miss the related podcast with Nordea’s Thematics team, Johan Trocmé and Viktor Sonebäck.

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