PREDICTING how we exit the worst recession since at least the Second World War has been a veritable past-time over recent months for economists, politicians, analysts and businessmen alike. And Sir Martin Sorrell, chief executive of the advertising giant WPP, has been the latest figure to add his letter to the alphabet soup of recoveries.<br /><br />Unlike the early 1990s, when he popularised the U-shaped – or “bath-shaped” recession – Sorrell last week reiterated his anticipated italicised L-shape recovery from the current recession, which he said indicates a gentle upturn after the sharp fall experienced last September in the aftemath of Lehman Brothers’ collapse. In this scenario, we would see slow and protracted growth for a long time to come, rather than the rebound proposed by advocates of V and W-shaped recoveries. <br /><br /><strong>PROTRACTED DOWNTURN</strong><br />Sorrell’s italicised L (also called a Nike swoosh) differs from the standard L-shape that economists such as Paul Krugman and Gluskin Sheff’s David Rosenberg worry about, where there is a protracted downturn with no recovery, such as that experienced by Japan in the 1990s.<br /><br />In the standard L-shaped scenario output falls sharply and the Fed’s slow interest rate cuts don’t work. In such a scenario, equity markets will continue to fall as firms try even harder to cut costs and overcome falling revenues.<br /><br />Sorrell’s italicised L is also much more optimistic than the W-shaped (double dip) recovery that a number of the more pessimistic strategists are predicting for the global equity markets at the moment.<br /><br />But, perhaps thankfully, Sorrell eschews chancellor Alistair Darling’s trampoline-like V-shaped recovery, and only sees a slight pick-up in 2010, “partly driven by weak comparatives, as the massive Keynesian fiscal injections, quantitative easings and interest rate reductions take hold”.<br /><br />If the italicised L scenario starts playing out, then investors should not be expecting miracles from the equity markets. Companies will have to cope with below-trend growth, muted consumer spending and the fragility of the global recovery.<br /><br />The pace of the summer rally in the markets will at best slacken and at worst grind to a temporary halt. Traders should be looking at short-term, nimble plays using leveraged instruments, rather than hoping to settle in to a position and ride out the recovery.<br /><br /><strong>RECOVERY </strong> FIVE POSSIBLE SCENARIOS<br /><br /><strong>THE V-SHAPE</strong><br />The optimistic trampoline loved by Alistair Darling.<br /><br /><strong>THE L-SHAPE</strong><br />Highly pessimistic and no recovery seen at all.<br /><br /><strong>THE U-SHAPE</strong><br />No immediate growth but a sharp rebound forecast.<br /><br /><strong>THE HOOK</strong><br />Moody’s forecast of a slow and painful recovery.<br /><br /><strong>THE ITALICISED L</strong><br />Sir Martin Sorrell’s Nike swoosh. Sees a gentle upturn in markets.