Only partway through and 2020 is already unique. The tragic human cost of the COVID-19 virus, the unparalleled pace and magnitude of its impact on the global economy (due to lockdown conditions), and the truly extraordinary response by policymakers around the globe have all made for an astonishing and utterly unpredictable opening six months to the year. What can we expect to see next?
The policy response from governments and central banks worldwide is set to remain active for some time, indeed the economic support already set in motion is likely to far outlive the health crisis itself. The economic downturn (which has already begun) is likely to be a deep one, but as recessions go it has the potential to be a relatively swift one too, provided demand can recover as economies reopen. Having taken a violent hit, demand for goods and services is expected to pick up fairly quickly as conditions move towards a new normality. If this takes place, we should expect a positive boost to economic growth from late 2020 onwards.
Taken altogether, despite the near-term pain, this could create a positive outlook for long-term investors. Indeed, as we write, a remarkable recovery is underway in financial markets, which have already recovered much of their composure since the height of turbulence in the spring.
What is the state of play today?
As we limp towards a way out of the COVID-19 crisis, the inevitable debate over balancing health and economic costs is in full sway. At the time of writing, the infamous virus ‘curves’ continue to ‘flatten’, meaning that the rate of confirmed new infections and deaths as a result of COVID-19 is slowing, even as the total numbers continue to grow. There are some initial signs from very high frequency, non-traditional economic data sources (like traffic congestion, energy consumption and hiring activity) that parts of the globe may have already passed their economic low point, suggesting that perhaps we can expect a lift in economic signals from here.
Second waves of infection remain a critical risk, but exit strategies are slowly being implemented in nations whose leaders feel able to ease restrictions. The early signs are relatively promising in both health and economic terms.
However, there are natural concerns about any potentially permanent economic damage created by lockdown conditions, as well as how the pandemic may have impacted how we behave as consumers, workers and global citizens. The entire planet charts an unknown course in the wake of the COVID-19 outbreak. Changeable lockdown states and erratic economic recoveries are very likely, as the world attempts to recover and repair with new uncertainties and evolutions in the offing for governments and central banks, industries and businesses, and consumers and workers alike.
What can we expect in this evolving world?
- Governments attempting to spend their economies into safety are likely to be indebted for longer, and financial markets can expect to see more government bonds being issued as leaders attempt to shore up their finances.
- Having begun to move on from the quantitative easing (known colloquially as ‘money printing’) policies of the post-2008 financial crisis world, central banks can now expect to be locked in to spending programmes and extremely low interest rates for the foreseeable future.
- In recent decades, globalisation has spread its wings, but supply chains could be increasingly ‘on-shored’ (brought back inside domestic economies), and the ‘just-in-time’ inventory policies of recent history could be replaced by more cautious inventory stockpiling among businesses. This has wide-ranging consequences, with knock-on effects for everything from taxation and employment to storage costs and shipping.
- With most businesses caught short in cash terms during the pandemic, changing corporate behaviours could also include precautionary saving, with fewer capital investments among the obvious consequences. Businesses may also seek to preserve cash rather than paying out to shareholders via dividends.
- Economic growth may be lower and more vulnerable to shocks, keeping bond yields lower for longer too. Where growth can be found across markets or sectors, investors are likely to hold that in high regard and trade it at a premium to other investments.
- Heightened social awareness could also propel the already-growing move towards a focus on responsible and sustainable business practices, as consumers increasingly scrutinise environmental, social and governance factors.
- Digitisation is likely to rise. The move away from the high street and towards online shopping is not new, but could be exacerbated by the pandemic, as shoppers seek to avoid crowded places.
- Workforces are likely to move to more flexible structures. Businesses have seen that their workers can be productive at home, creating the potential to save expense on full-time office space for all employees. Commuters may also prove reluctant to return to long journeys on crowded public transport.
- Debates around moral hazards linked to the misallocation or abuse of public funding are likely to pick up sharply, particularly as the immediate dangers pass and the reality of government spending levels hits home. The need has been great, but so has the scale, leading to potential imprecision and mistakes. No systems created at such speed are likely to be perfect.
Does this sound familiar?
Many of these wheels were already in motion ahead of the pandemic. Moral hazard debates that began amid the bailouts of the 2008 financial crisis have never gone away; cloud computing and hot-desking have been increasing features of more flexible workforces, and re-shoring of supply chains has been a growing issue given trade tensions around the world. Investors will be all too aware that low interest rates have long been accepted features of the financial landscape. In this sense, the trends of the post-COVID-19 world are much like the pre-COVID-19 world, but more intensified.
As long-term investors, adapting to and anticipating these developing trends is part of our approach, as demonstrated by thematic positions within our portfolios, including technology (software) and healthcare holdings, as well as a focus on sustainable assets.
Portfolios may include individual investments in structured products, foreign currencies and funds (including funds not regulated by the FCA) which may individually have a relatively high risk profile. The portfolios may specifically include hedge funds, property funds, private equity funds and other funds which may have limited liquidity. Changes in exchange rates between currencies can cause investments of income to go down or up. The value of any investment and the income from it is not guaranteed and can fall as well as rise, so that you may not get back the amount originally invested. Past performance is not a reliable indicator of future results.