As recessions go, the one brought on by Covid-19 was an unusually deep one, with many advanced and emerging economies contracting by well over 10% from peak to trough, and a few by closer to 20%. However, it was also unusually brief, with the period of contraction lasting for only one-three months in most countries, as well as atypically strong. Incoming data suggest that the global economy is on track to expand by more than 5% in the third quarter alone.
While the speed of that early recovery is undoubtedly good news, it has come with a very important catch. Rapid initial growth was facilitated by loosening restrictions on patterns of work and social activity. But this very same easing, together with a raft of public health mistakes, has been responsible for the widespread resurgence of the virus.
Finding the balance
The upshot is that few countries so far have found the right balance between restarting economies and keeping populations safe. And as a result, there are signs in the U.S., U.K. and Eurozone data that the speed of the recovery is already fading, and we cannot rule out double-dip recessions in some of the worst-affected countries and regions.
The latest viral news has been a timely reminder that most of the story of this pandemic and its consequences is still to be written. Among the keys to the shape of recoveries, the extent of long-term damage done by the crisis and the nature of its winners and losers will be:
- The quality of public health responses to future waves of the virus
- Vaccine development and efficacy, including the ability of governments to roll them out to vulnerable populations
- The willingness of policymakers to sustain support to households and firms for as long as private sector demand remains fragile
- The ability of governments to make the tough decisions required to render their economies more resilient to new crises and able take advantage of future growth opportunities
The only certainty is difference
In fact, as we shift our gaze to our longer-term future, only one thing is certain: it will look very different to the recent past. The Covid-19 pandemic has accelerated some trends that were already under way before the crisis. Examples include:
- Digital innovation and deployment, the slowing of globalization
- A shift towards fiscal policy as the primary tool of demand management
- The way in which long-standing economic and social inequalities were eroding trust in political institutions and the quality of public policy choices
- The reinforcement of the "lower-for-longer" problem constraining aggregate asset returns
However, the pandemic has also generated new trends not previously foreseen — or at least not anticipated so quickly — such as transformations in patterns of work and travel, and the need for pandemic-resilient business, health and social models. Meanwhile, the crisis has also revealed just how ill-prepared we are for the even more serious — at least from a very long-term perspective — but slower-burning climate crisis.
The challenges ahead
This may seem like a diverse list of challenges, but they all have some key features in common. One is their dependence on the quality of government interventions. The full benefits of the digital revolution won’t be captured unless policy and regulation diffuses the potential gains to more firms and individuals. Similarly, the rapid decarbonization of the global economy that is necessary to meet the objectives of the Paris Climate Agreement cannot take place without governments greening their infrastructure spending and putting a sufficiently high price on carbon. Meanwhile, our fragmented politics can’t be put back together unless policymakers address the myriad inequalities plaguing our societies. The old adage that one should never waste a good crisis has rarely been more apt!
The second common feature of these challenges is the facilitative role that the investment community can play. Asset managers connect large pools of saving with investment opportunities. Our capital allocation decisions heavily shape the future. As such, by paying very careful attention to the complex nature of economic and social change, as well as the evolving expectations of the broader public, we can be positive engines of change and deliver stronger, more sustainable returns to our clients. This includes incorporating stronger ESG-related principles into the way we engage with companies, seek to influence governments and manage our own corporate behavior.
The third commonality among this list of challenges is that they may represent an enormous opportunity in the post-Covid-19 political, economic and market environment because they are likely to be accompanied by significant structural changes across geographies, sectors and securities within asset classes. In short, averages may be weak, but dispersion will be high, creating opportunities for active managers to generate returns that are higher than index averages.
Looking forward to tomorrow
We can overcome the dismal arithmetic of averages by drawing on rigorous, forward-looking, thematic research that identifies the relative winners from post-Covid-19 cyclical and structural change, and then tilting portfolios and solutions towards those companies, sectors, securities, indices and physical assets where the opportunities are greatest compared with what is already priced in. This, in turn, allows us to deliver the strong returns to and solutions for our clients that they need to meet their long-term wealth accumulation and consumption smoothing goals.