Like many of you possibly, I have recently returned from a relaxing holiday. This year we decided to stay in the UK, with Arisaig on the West Coast of Scotland having had the dubious pleasure of welcoming us. Time away from the house, which has become both one’s living and working space over the last five months, offered the chance for reflection and the opportunity to reappraise the prospects for the global economy and financial markets.

Whilst it was great to go away, it is always nice to come home. However, this time it felt different to the returns. Indeed, the feeling that overwhelmed me was one of “here we go again”, and a return to the uncertainty of the last few months. We might well be living in a world where asset prices have made a near full recovery, but the economic and medical situations remain enigmatic and open to a range of different outcomes in the coming months and quarters. Moreover, the chance of further market volatility in the remainder of this year and beyond is very high.

The economic situation has become clearer in recent weeks. We have seen that the developed economies have reopened to the point where keeping Covid-19 under control is much harder. Until something materially changes with the medical situation, further removal of restrictions will likely lead to a resurgence in cases. It is becoming increasingly clear the current state of semi-economic paralysis is here to stay until the virus is beaten or a vaccine is developed. This, therefore, remains an open-ended situation that is extremely hard to forecast.

There has been plenty of discussion over whether we can use China as a leading indicator for our own immediate future, given that the authorities appear to have gained a high degree of control of their own Covid-19 situation. We are now not sure that we can. The nature of the Chinese government and the relatively authoritarian approach that they can take with their population, probably means that they are at a significant advantage when it comes to quelling Covid-19.

However, we can learn from their current economic experience. The positives are that the Chinese economy is bouncing back, and various parts of the industrial and manufacturing economies are back up towards full capacity. Furthermore, sales of larger products and activity in the housing market are also relatively healthy. Darker clouds hang over the retail and services sector, with clear evidence that the appetite to go back to shops and restaurants is presently limited.

So, what are the chances that a medical solution is found? There appears to be building optimism that a vaccine can be developed and that there should be widespread distribution early next year. This is by no means certain, but should a successful vaccine be developed and distributed then growth will be on track to achieve the levels that we last saw back at the end of 2019, as we have forecast for the end of next year.

Governments have responded to the enforced closure of economies by trying to limit the economic damage through unprecedented levels of spending. Going forward, governments will be under pressure to spend extraordinary amounts to try to quell social discontent, bridge the ever-widening gap between the “haves” and the “have nots” and avert the “climate crisis”. The central banks will have no choice but to work hand in hand with the governments in a likely vain attempt to keep the economy moving forward.

We cannot forecast whether the hyperactive behaviour of governments and central banks will ultimately be a help or a hindrance. In the short term, we would suggest that they had to do “something”, given the decisions that our politicians took to shut down their respective economies. However, the actions of the government and central bank partners have been much more supportive of asset market gains, rather than generating economic activity.

Given how far “under water” most asset markets were at the end of March 2020, it is somewhat astounding that, as we ended July, most markets had enjoyed a near complete “V” shaped recovery. Obviously, there are some notable exceptions, including the languishing UK equity market, but there is broadly almost no reflection of the economic damage experienced so far this year in the levels of global asset markets. Many of our clients have asked us if this disconnect is sustainable. We have to admit that we simply don’t know, but there appears to be no desire on the part of central bankers and governments to stop the flow of money to investors and markets.

In addition, when one scratches beneath the surface of headline equity indices, it is immediately visible that there has been an ever-widening bifurcation between those companies and sectors perceived as winners of the COVID-19 crisis and those viewed as losers.

Tim Wishart is head of Scotland and north of England at Punter Southall Wealth