Expect bumpy path to economic recovery: Aviva Investors

Pre COVID-19 levels of economic activity are unlikely to be reached until mid-2021, according to Aviva Investors, as the path to recovery will not be smooth sailing. 

The firm said it expected economic activity would begin to revive in the second half of 2020 but there was the possibility of further outbreaks and lockdown which would dampen any recovery.  

In a note, it said: “Weakness will be concentrated in Q2, which could see falls in GDP [gross domestic product] of between 10%-20% in the major developed nations. The rebound that began in May will be reflected in Q3 data, when output and demand are set to rise by 5% to 15%. Although this can be described as V-shaped, pre COVID-19 levels of activity are unlikely to be reached until the middle of next year. 

“The path back is unlikely to be smooth and the pattern will vary across countries and regions. Renewed outbreaks may need to be countered by the re-imposition of some restrictions.” 

In light of the pandemic, Aviva said its asset allocation was to be underweight global equities because of “stretched valuations” and overweight credit. Within credit, it had a preference for US and European investment grade.  

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Michael Grady, head of investment strategy and chief economist at Aviva Investors, said: “We prefer to be modestly underweight global equities because of stretched valuations and elevated risks to the economic outlook. Our overweight position in credit is based on relatively more attractive valuation metrics, as well as being supported by central bank purchases.  

“Within credit, we have a preference for US and European investment grade. In the sovereign space, we are modestly overweight, with a preference for the US where there is scope for further yield declines.”