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Initially centred in China, Covid-19 has now spread to the rest of the world. The number of infections in Europe and the US has spiked, while draconian measures taken in China show first signs of successful containment of the virus. The economic cost of containment, however, may be high, given subdued activity and supply disruptions during this period. Financial markets reacted accordingly, and risk assets sold off substantially as many market participants have become nervous. The collapse in the oil price due to the dispute between Russia and Saudi Arabia, coupled with demand worries, have only exacerbated this nervousness. Indeed, current asset prices start to discount a recession in the near term.

Scenario 1: Recession (75% probability)

  • The outbreak spreads globally, partially uncontrolled, ends in China 
  • Severe public health measures freeze everyday life and shatter confidence 


  •  Virus shock ends the business cycle
  •  Demand shocks in travel, tourism and leisure spill over into broader economy
  •  Unconventional stimulus 2.0 with negative rates or helicopter money
  •  2020 growth: 1.5% global, 0.3% USA, -0.4% Europe, 3.5% China

Capital markets

  •  S&P 500: 30% downside from peak, recovery towards 3,000; US BBB corporate spread: peak at 350bps
  • Treasuries: up towards 2%; Gold: peak above USD 1,625

Scenario 2: Sytemic crisis (20% probability)

  • Out of hand pandemic, second wave of outbreaks around the globe
  • Overwhelmed health systems, severe measures lastingly affect everyday life


  • Virus shock leads to a depression
  • Negative feedback loops deepen the downturn such as closed credit markets, social unrest, or geopolitical turmoil
  • Stimulus cannot prevent a corporate debt melt down, or Eurozone crisis revival as mistrust runs too deep
  • 2020 growth: -0.6% global, -0.6% USA, -1.7% Europe, 0.1% China 

Capital markets

  • S&P 500: <50% downside from peak, recovery towards 2,500; US BBB corporate spread: peak at 450bps
  • US Treasuries: low at 0.2%; Gold: peak above USD 1,900; EUR/USD low at 1.05

Scenario 3: Shock (5% probability)

  • The outbreak spreads globally, ends in China, fatality ratios drop
  • Wide-spread quarantine measures have temporary impact on daily behavior and confidence 


  • Virus shock severely dents the cycle
  •  World growth rebounds in late Q2 and Q3 2020 led by China, as consumption and supply chains normalise
  •  Swift fiscal and monetary stimuli, which extends the cycle into end 2021
  •  2020 growth: 2.4% global, 1.3% USA, 0.4% Europe, 4.7% China

Capital markets

  • S&P 500: recovery towards 3,200; US BBB corporate spread: peak at 125bps
  • US Treasuries: up beyond 2%; Gold: drop to USD 1,500


Impact on the economy
We still believe in a minor possibility that the world will get away with a shock. However, this is rather unlikely. We rather believe that we have to prepare for a pronounced and protracted recession. This means we will be seeing a sharp drawdown in economic activity and the financial markets, which have already started to price this scenario as the main scenario as well.

The third possibility is a systemic crisis. In this scenario, either the epidemic cannot be contained, or policy response will not be strong enough. We already see the knock-on effects happening: cash flows are dropping, people are not able to pay their bills, businesses have to declare bankruptcy…The impact on the economy would be considerable.

We believe this is a real risk, which is why policy response is essential. Luckily, we have already seen a lot of activity in this realm. For this reason, we are confident that the world will get away with a protracted, heavy recession. A recession that hurts badly, but that will end so that there is space for a new cycle to start as of next year.

Impact on the financial markets
Of course everybody hopes for the shock scenario to materialise. There is a possibility that a vaccine or another form of treatment will be found in time. In the best case, this would mean that the economy recovers to the all-time highs of the S&P500. Gold would tread water, bond yields would recover. However, we believe that this is highly unlikely to happen.

We rather think that a recession is hitting in, also because the market is already pricing this scenario. Equity markets, for example, lost more than 20%. Especially in the bond market, however, you already see some response to the policy measures that were put in place. We are confident that they will help, as luckily we observe a high sense of urgency in the political field.

In our last scenario, the systemic crisis, we’d see further downside in risk assets, in particular in equities. They might even fall another 20% from current levels. Gold would be shooting through the roof as a safe asset, while bond yields would be completely beaten down. 

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