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Back to normal? Investors bet post-Covid world may not look so different
Reuters, London/New York
The global economy is suffering its worst slowdown since the Great Depression, millions have lost jobs and industries have been brought to their knees.
But some of the world’s leading money managers reckon economies may not look so different from their old selves after the pandemic passes - many are betting on a speedy recovery and little ‘scarring’, with hardest-hit sectors rebounding fastest.
Fuelling the optimism are the vaccine breakthroughs, but underlying it is the view that thanks to vast government support and central bank stimulus, consumers and businesses will emerge less damaged than in past recessions.
“When you look at prior periods like this where pandemics have impacted regions of the globe, there tends to be a greater snapback or return to normal than some people may suggest,” Dan Ivascyn, Chief Investment Officer (CIO) of PIMCO, told the Reuters Global Investment Outlook Summit this week.
Ivascyn did not think there would be “radical change post-pandemic”, though employment levels will take time to recover.
Government job support schemes and a spike in savings rates as people stayed indoors mean consumers have more cash to splurge on services when economies fully reopen.
Peter Fitzgerald, CIO for multi-asset and macro at Aviva Investors, pointed out that household income has actually risen during this recession. While demand for services collapsed, spending on goods is also up 10 per cent in 2020, he said.
He was wagering on a further rebound in the banking, leisure and tourism stocks in Europe that were whacked the hardest in the COVID-19 sell-off.
“Our view is that as you lift restrictions, the world will revert back to something more similar to what we had pre-coronavirus rather than some sort of new normal everybody likes to talk about,” he said, noting that when the UK briefly lifted travel restrictions almost two million people booked flights to Spain for August.
Confidence among financial institutions about a strong recovery - demonstrated starkly with the series of record highs stock markets have recorded in recent weeks - may sit uncomfortably with rising unemployment and fears that a second wave of COVID-19 will undo a tentative economic rebound.
After plunging more than 30 per cent in February and March, global stocks have surged 60 per cent to record highs and appear to be picking up the record-long bull run where they left off.
Jim Leaviss, CIO of public fixed income at M&G Investments, said that what mattered for markets was the level of “scarring” - the longer-term impact of higher unemployment and business failures that could constrain future growth potential.
But he said many of the job losses so far had been in relatively lower-skilled sectors including retail and hospitality rather than higher-skilled manufacturing industries.
BlackRock’s CIO of global fixed income, Rick Rieder, was notably bullish - he said that as economies rebounded, money would be made in buying industrial, leisure and housing companies and European banks.
“I’m very optimistic about the economy,” he said.
No that economies will emerge totally unchanged in 2021 - mountainous debt piles, record sums of central bank bond-buying, soaring money supply and huge government expenditure mean inflation, low for so long, may finally return.
North American and European economies are unlikely to recover to pre-COVID-19 levels before 2022 at the earliest, economists say, while generous employment support schemes may mask the real hit to jobs.
Amundi’s CIO Pascal Blanque, for one, said he expected a “regime shift” in the macroeconomy and the risk of stagflation - low growth and inflation together. “I think we will wake up somewhere in the 1970s,” he said. “The consequences for financial stability are being challenged.”
While Blanque thought the stock valuations of the Big Tech firms were a “perfect bubble waiting to burst”, others said the 2020 shock could act as a catalyst for the digital revolution.
Virtual working, online shopping and reliance on newer technologies to save costs all accelerated during the pandemic.
“The virtual world will be a driving feature of the new normal - so there is a fundamental shift,” said Sonja Laud, CIO at Legal and General Investment Management.
And those changes could benefit the same technology companies that dominated the previous decade-long bull run.