Global Outlook May



Rod Paris, Chief Investment Officer

I write this introduction well into my second month of working from home. I am pleased that our firm has settled well into its new rhythm of remote working and is coping admirably with the challenges that this inevitably brings – both from a business and a personal perspective. Throughout the coronavirus crisis, we have sought to stay connected as a team, but also to stay connected to our clients. I hope that this edition of Global Outlook will help to serve this latter aim and will shine a light on the current thinking across our business.

The actions to halt the spread of the coronavirus have seen the brakes being applied to the global economy in an unprecedented manner. Fiscal policy levers have been pulled to try to alleviate some of the economic pain. Meanwhile, monetary policy levers have been pulled to inject liquidity into the financial system and to stimulate slowing economies. The outlook for investors has rarely been more uncertain, but the passing of time means that we are now in a slightly better position to assess all these factors. This month’s articles seek to do this.

In our spotlight article, Jeremy Lawson, our Chief Economist, notes the huge uncertainly in mapping the economic landscape ahead and hence “looks forward with humility”. The scale of the damage already done to the global economy is clearly outlined, but so too is the framework that will guide the way we forecast in such an uncertain environment. He also sets out the many different routes to cope with the effects of the virus being taken by policy-makers around the world. Finally, he touches on what is likely to become a heated debate on the long-term inflationary implications of the current policy actions.

One of the views that I have tried to encourage our teams to keep front of mind is that the economic, market and societal impacts of the virus are likely to result in an acceleration of many existing trends. One of these trends will undoubtedly be, the growing importance of, ESG themes in driving corporate performance and investment decision making. Hence, in our next article Kate McGrath, ESG Analyst, touches on the likely acceleration of climate centered investing, growing dissatisfaction about the way some parts of the workforce are treated and valued, and the ongoing desire globally for better corporate governance. These important areas were front of mind before the virus – they will be even more so after it.

Our next article is by Peter McKellar, our Global Head of Private Markets. Peter outlines the impact we have seen so far in the private market arena , which covers huge swathes of the global economy, from real estate to infrastructure and from venture capital to corporate buy-outs. He also outlines the extent of ’dry powder’ or cash available for investment in this area. Finally he starts to paint a picture of what the ’new normal’ might look like for private markets.

We then move to equities and to Devan Kaloo, our Global Head of Equities. As such a significant investor in equities around the world, we have close contact with companies in all sectors and therefore with those closest to financial fallout from the impacts of the virus. Devan reflects on this contact, and the part that we must play in working with the companies in which we invest to help them get through this period. Finally, he reminds us to focus on fundamentals, but noting that periods of volatility such as this, have always provided opportunity.

In our final article Luke Hickmore, Investment Director in our credit team, considers the fixed income markets. These markets were at the epicentre of the liquidity crunch we saw at the start of March, as investors sought high quality government bonds and fled from riskier corporate and sovereign bonds. Luke takes stock from where we are now and starts to map out an investment course for the months ahead, both by country and by company.




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Rod Paris


Looking ahead
with humility

Chapter 1


Jeremy Lawson, Chief Economist

A historically deep global recession is in train as large swathes of activity have been shuttered in an effort to slow the spread of Covid-19. A recovery of sorts will begin in the second half of the year, but it will be slow, painful and uneven. Permanent hits to output are likely, though the magnitude is in the hands of policymakers.

Forecasting is difficult at the best of times. Amid a global pandemic that has prompted governments around the world to deliberately shutter their economies it is doubly so. There are simply too many moving parts, each undergoing changes well outside their historical ranges, to rely on traditional models or rules of thumb to project the future with any real confidence.

Although the global recession will probably be the deepest in 90 years, it should be comparatively brief

But there are still things we can do to guide our forward-looking decisions. One is to develop rigorous analytical and research frameworks to answer the most important questions, founding conclusions on the strongest available evidence. A second is to treat our forecasts as flexible anchor points. That means being honest about the uncertainties, articulating a wide range of plausible alternative scenarios to our central views, and above all, being prepared to update our views as compelling new information comes to light.

A historically large downturn but also unusually brief

In articulating our current outlook, it’s best to begin with the few things we feel confident about. The first is that between February and May, the global economy will contract by an unprecedented amount over such a short timeframe. This will push nearly every economy in the world into historically deep recessions.

Our best guess is that this will lead to a little over 9% decline in global output this year, more than three times greater than during the GFC (see Table 1). But the actual decline could be anywhere from 5% to 15%, depending on how statistical agencies measure the lost output, when the strictest social distancing measures end, and how quickly they are phased out.

Table 1: Growth and Inflation Forecasts

Source: Aberdeen Standard Investments (as at May 2020).

Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed and actual events or results may differ materially.

The second is that although the global recession will probably be the deepest in 90 years, it should be comparatively brief. As soon as formal government lockdowns are removed, those types of activity that are allowed to resume, either because of their comparative importance or the ease with which informal social distancing can be sustained, will begin to rebound.

We have already seen this play out in China, the country first in and first out of lockdown. But it is also starting in those parts of Asia Pacific and Europe that have been most successful in suppressing the growth rate of new Covid-19 infections, and will be followed in the next month or so by the European laggards and the Americas.

This ‘partial resumption’ phase has the potential to be associated with growth rates that are much higher than typical post-recession rebounds, aided and abetted by aggressive fiscal and monetary easing. It is already clear that consolidated public-sector balance sheets will absorb a very large proportion of the shock to private-sector incomes in an effort to prevent an even more disastrous solvency crisis.

Outside of China, the total of implied and pledged government spending, contingent lending and central bank asset purchases already exceeds the cumulative easing following the GFC. And there is definitely more to come. Although public-sector debt will mount considerably in the near term, this coordinated policy easing represents the best chance of avoiding a depression and even worse debt dynamics over the longer term. That underpins our base case for the global economy to expand by around 9% in 2021, though again, the confidence intervals around that number are extremely high.

Considerable dispersion of impacts with at least some permanent loss of output

We are also confident that while all countries will suffer in the near term, the scale, duration and persistence of the shock will vary considerably. Key drivers of dispersion will include the strength of countries’ public health campaigns, the efficacy of policy responses, the seriousness of imbalances before the crisis, and exposure to the negative long-term consequences of the pandemic.

Contrasting vulnerabilities are everywhere. Across the largest economies in Europe, the German public health response has been far more effective than that of France, Italy and Spain’s. Similar divergences are playing out in terms of the scale and efficacy of fiscal policy responses, amplified by the weakness of coordination efforts and failure to adequately mutualise risk. Both will heavily condition the relative timing and success of exit strategies, though the European economy is so heavily integrated that all will suffer amid the fragmentation.

The US is usually regarded as the most dynamic of the large Western economies. But on this occasion its public policy response has been decidedly haphazard. Though there is much talk of phased return-to-work plans, the federal, state and local governments are still not on the same page, and testing and contact-tracing capacity has not expanded sufficiently to make those plans effective. Meanwhile, Congress’s failure to adequately subsidise firms to keep employees on their payrolls has led to more people losing jobs in a two-month period than gained them over the previous decade (see Chart 1).

Chart 1: US Unemployment Woes (Thousands)

Source: Aberdeen Standard Investments, Haver (as of May 2020).

Australia and New Zealand have been very successful in keeping COVID-19 case numbers and death rates extremely low. But that has occurred at the expense of keeping the rest of the world out. Both countries also have household sectors highly geared to housing markets that have been underpinned by low unemployment and high immigration rates. It is therefore hard to see anything besides a grinding and painful recovery taking place as domestic imbalances unwind.

Divergent risks are not confined to the advanced economies, of course. Within the emerging-market (EM) complex, some important countries have been slow to respond to the danger (Mexico and Brazil), have under-resourced health systems (India and Indonesia), or are vulnerable to balance-of-payments crises (Columbia, Egypt, South Africa and Turkey).

So far, most EM economies have been able to mount countercyclical monetary and fiscal actions, aided by the Federal Reserve’s recent success in dampening stress in dollar funding markets. But mammoth increases in government debt issuance will significantly test that capacity. The upshot is that capital controls are likely to ratchet up, and many countries will be forced to go cap in hand to the International Monetary Fund to manage external funding pressures.

Permanent damage

At least some permanent hit to global economic capacity and demand looks likely, even if its extent remains highly uncertain. That loss is expected to come from a number of channels. While policymakers are for the most part doing everything they can, viable firms are already going bankrupt and valuable labour market matches have ended. Both will weaken economies productive capacity for many years.

In addition, because the crisis is turning into a leveraging event – for the corporate sector in particular – demand will be suppressed through the process of balance-sheet repair amid subdued income growth. This increase in company leverage against a backdrop of ultra-low interest rates will also create more ‘zombie’ companies, further weighing on productivity growth.

Meanwhile, the lesson from historical pandemics is that they usually lead to long-term increases in risk aversion, pushing up precautionary saving rates and lowering desired investment. So the current crisis is likely to reinforce the secular stagnation that already characterised the pre-pandemic economic environment.

Finally, the early signs are that the pandemic is leading to further fragmentation of the global economic and policy order. Rather than working closely together, countries have turned more inwards. The impetus behind globalisation was already weakening in the years leading up to the pandemic and now voters and politicians are receiving a lesson in the downside of long supply chains and dependence on foreign countries.

Focusing on ranges rather than point estimates

Taken together, our expectations imply that the trajectory of the global economy is most likely to follow a ‘reverse J’ pattern or even a ‘Nike swoosh’. However, beyond that the certainties vanish, particularly when we stretch our horizons beyond the next few months.

While some long-term effects seem obvious – like the acceleration of on-lining and more resources being directed towards health systems - most are not. In fact the list of questions one has to get right to accurately forecast the path of GDP over the next decade is therefore dauntingly long.

To illustrate the point, consider the following four questions:

  • Will future outbreaks of Covid-19 be severe and widespread, or moderate and geographically isolated?
  • Will the current crisis strengthen or weaken countries’ willingness to work together to overcome common challenges?
  • Will domestic fiscal support measures be kept in place for as long as private demand is constrained, or withdrawn quickly as was the case after the GFC?
  • Will the regulatory and policy responses to the crisis increase or lower incentives for firms to innovate and be rewarded accordingly?

Arrange those four questions in a decision tree and one is left with 16 different long-term trajectories for the global economy. These in turn will influence the path for inflation, earnings, interest rates and the path of risk assets. And this is by no means an exhaustive list of the important questions that need to be answered.

Table 2 and Chart 2 show how we communicate our forward-looking views while taking this uncertainty into account. We have identified five main stylised paths for the global economy over the next three years, each of which is anchored on a different set of assumptions about the course of the virus, attendant containment measures, the efficacy of policy responses and the extent to which the crisis permanently scars behaviour and activity.

Table 2: Scenario Analysis

Source: Aberdeen Standard Investments (as of May 2020).

Indicative probabilities are estimates with wide confidence intervals and should be interpreted with caution given the high levels of uncertainty regarding virus progression, policy steps and behavioural responses. The scenarios in the table account for 75% of total probability mass; the remaining 25% sits in the vast range of alternative potential outcomes that cannot be captured in this exercise. Importantly, missing scenarios are not necessarily to the upside: the numerous alternative possible outcomes are likely a spectrum of downside as well as upside scenarios (relative to the base case).

UK Credit Spreads: We can broadly expect GBP Credit to be very similar to USD, maybe knock back 50bp under the USD to allow for investors to concentrate selling on the most liquid market. Also there is always, of course, a tendency for markets to approach a correlation of 1 in times of stress.

Please note that yields will overshoot, going negative, however negative yields difficult to sustain given aversion to negative policy rates in the UK and US).

Chart 2: Longer Term Recovery Scenarios (Re-based)

Source: Aberdeen Standard Investments (as of May 2020).

Forecasts are offered as opinion and are not reflective of potential performance. Forecasts are not guaranteed and actual events or results may differ materially.

Although we have assigned probabilities to each outcome, they should be treated as indicative only, with more attention given to the ordinal ranking. The main message is that while a ‘reverse J’ trajectory for global output is the single most likely outcome, the cumulative likelihood of all other outcomes is considerably higher. These range from a U-shaped pattern involving no permanent output losses to scenarios implying slower recoveries and much larger permanent losses than in our baseline. The other important message is that we think that overall, the risks are tilted to the downside of our central scenario.

Questioning the inflationary consensus

Just as the story of the long-term growth consequences of the pandemic has yet to be written, so it is for the story of its inflationary consequences. In recent weeks, strategists have often asserted that this will finally be the crisis that gives way to an era of much higher inflation. The narrative is deceptively simple. To prevent a deep recession from turning into a depression, governments are racking up deficits rarely seen in peacetime. Because growing our way out of the resultant debt overhang will be impossible, inflating away its real value, aided and abetted by central bank asset-purchase programmes, is the only viable escape route.

But think more deeply and the narrative starts to unravel. Similar claims were made immediately after the GFC when public debt ratios jumped across a wide range of countries and central banks first began buying government bonds in size. In reality that crisis opened up enormous amounts of spare capacity in the global economy. That, together with persistently sluggish demand, as well as other structural forces, ultimately put significant downward pressure on labour costs and margins over many years. As a result, in most countries, inflation was still below central bank targets more than 10 years after the GFC ended.

Fast forward to today and similar dynamics are at play. Although social distancing weakens the supply side of economies, it weakens the demand side even more. Look across large swathes of the economy – from travel and tourism, to retail and hospitality, to housing and leisure – and demand is likely to fall well short of existing capacity for many years, whether through income or behavioural effects. That will put downward pressure on unit labour costs and corporate margins.

The claims also don’t align well with what central banks are actually doing. The objective of quantitative easing isn’t to finance budget deficits, but to loosen financial conditions when policy rates can’t go any lower. In fact, deploying quantitative instruments has always been the bread and butter of central banks. Before the GFC, open-market operations were used to keep overnight rates close to their target. And it was not so long ago that central banks primarily achieved their objectives by varying the growth rate of the money supply.

Quantitative easing, then, is just the natural extension of those actions into a wider set of long-term bond and credit instruments. Could this eventually give way to an era in which central banks lose their independence and become subservient to government financing needs? Yes, which almost certainly would be inflationary. But is it more likely than the current crisis proving as disinflationary as the aftermath of the GFC? Absolutely not. Investors should be at least as worried about the world becoming more like Japan as about returning to the inflation of the 1970s.



Although the global recession will probably be the deepest in 90 years, it should be comparatively brief

How does Covid-19
affect ESG Investment?

Chapter 2


Kate McGrath, ESG Analyst

Jeremy Lawson, Chief Economist

Amanda Young, Global Head of Responsible Investment

The Covid-19 pandemic is presenting challenges to businesses on a scale rarely seen before. Almost overnight markets for goods and services have shrunk dramatically under lockdowns and social distancing measures. Firms are then having to navigate these difficult conditions while managing remote workforces and disrupted supply chains, as well as protecting the health and wellbeing of their staff and customers.

During times of crisis ESG factors come to the fore. Under acute scrutiny from politicians, customers and their own people, the decisions firms make today and over the coming months will shape their future success. It may even determine whether they retain their social licenses to operate without inviting much heavier oversight in the future. The relative winners will be those demonstrating leadership with integrity and purpose. The losers will be those seen as ducking their responsibilities and exploiting their stakeholders.

Improving air quality amid a collapse in global greenhouse gas emissions has been one of the few positive manifestations of the Covid-19 crisis

To that end, ESG assessments are a critical tool for evaluating investment risks and opportunities when building portfolios. At least so far, stocks with higher ESG ratings outperformed stocks with weaker ratings during the recent bear market. And according to Morningstar data a majority of ESG-focused large-cap equity funds outperformed the global tracker during the March correction.1

Of course, some of that outperformance reflects the different sector weightings of ESG-focused funds, such as their lower exposure to energy stocks. But that is not the whole story and we are firmly of the view that strong ESG attributes enhance firm performance and resilience over the longer run.

Environmental effects

A near-term reduction in emissions

Improving air quality amid a collapse in global greenhouse gas emissions has been one of the few positive manifestations of the Covid-19 crisis. Daily carbon dioxide emissions have fallen by around a third in the UK since lockdowns began. Nitrogen dioxide emissions in Chinese cities have fallen by as much as 25%. And in New York, carbon monoxide emissions have been reduced by nearly 50%.

The problem is that those emissions reductions are attributable to an enormous recession that is cutting deeply into people’s living standards. The climate challenge – how to transition to a low carbon economy without sacrificing economic growth in the process – therefore remains as salient as ever.

An opportunity to accelerate progress

The good news is that the recession represents an enormous opportunity to accelerate policy change and ‘green’ the public and private capital spending that will be needed to rebuild the post-Covid global economy. Not only will interest rates remain low for a long period of time, but there is a growing body of research demonstrating that low carbon investment projects have very high fiscal multipliers.

Moreover, there are already signs that European and some Asian countries are looking for ways to strengthen their climate goals and policies in the wake of the crisis.

Persistent behavioural changes are also likely. For example, businesses may forgo some international travel as video calls become more viable ways to communicate. More agile working patterns could also reduce transportation emissions by lowering commuting travel.

But no room for complacency

That said continued progress cannot be taken for granted. In the US, the federal government is currently taking steps to weaken auto emission standards, while fossil-fuel centric energy firms have benefited more than renewable energy firms from crisis-related loan support.

In Europe, the largest airline association is asking the authorities to waive or at least delay new legislation that would constrain future emissions.

The large drop in oil prices over recent months may increase demand for travel when recoveries begin, counteracting some of the positive behavioural changes.

In addition, more digital communication will not be entirely environmentally friendly. Internet usage, and in particular streaming activities and cloud computing, consume a lot of energy, much of which is derived from fossil fuels.2,3,4

More generally there is a risk that some governments will postpone scaling up their targets and policies as they prioritise short-term growth over long-term sustainability.

To that end the COP-26 climate summit originally scheduled to take place in Glasgow later this year has already been postponed until 2021.

The postponement is not necessarily a bad sign as officials seek to travel less, focus more on the immediate crisis and take time to carefully consider their climate objectives. But given the importance building on the original Paris goals, next year’s summit will be a critical litmus test of governments’ ambitions. This includes strengthening commitments towards a just transition that protects vulnerable communities, particularly in developing countries.


Climate change might be the most pressing environmental challenge but it is far from the only one that needs attention. After positive progress over the past two years, pollution related to the use of plastics has increased during the crisis as firms in the retail and food sectors have made more home deliveries.

In addition to adding to pollution, the increased use of plastics is delaying progress towards a more circular economy. Indeed, the crisis has highlighted the dearth of systems facilitating the transition to zero-waste lifestyles. The investor imperative is to use the crisis to expose the structural impediments to reducing plastics use and promote more innovative solutions.5

Labour and Human Rights

Social factors – the ‘S’ in ESG - are at the heart of the COVID-19 crisis. As a global pandemic that has already claimed almost 300,000 lives it is first and foremost a health emergency. As companies lay off and furlough workers in the tens of millions it is also causing deep damage to labour markets and workers’ well-being. Meanwhile, the crisis is amplifying inequalities as lower skilled workers, as well as women and minorities are disproportionately losing jobs and incomes.

What follows is a discussion of the most important challenges and our expectations of how firms will manage them.

Access to safe working environments

The World Health Organisation (WHO) has warned that panic buying, hoarding and misuse of PPE is putting lives at risk.6

The healthcare sector is not the only sector affected by this issue. Workers in various customer-serving roles have scrambled to buy PPE, often at inflated prices, re-used single-use PPE or created makeshift versions. Given the dangers of these practices we are urging companies to prioritise the provision of WHO-standard PPE equipment where it can be sourced appropriately.

More generally, companies should put in place measures to protect the health and safety of employees, as well as promote positive welfare initiatives amid much greater scrutiny from stakeholders. Those with proportionally large low skilled workforces should be particularly mindful, since such workers may lack the ability to take preventative measures themselves, access medical care or new information on the virus.

Health and leave provisions

Lack of access to adequate healthcare and paid sick leave is surprisingly widespread. In the US for example, around 11% of the population does not have health insurance and until Congress too action recently, 25% of workers did not have paid sick leave.

In recent years the emergence of the ‘gig’ economy in particular has increased the number of vulnerable workers with little or no job security, time off, or sick pay. Many have therefore been forced to continue working through the Covid-19 crisis regardless of the potential negative health impacts.

We regard this as a key risk for companies that are dependent on contractors, temporary or other ‘gig’ workers without normal worker protections. That is because such practices present operational and future reputational risks as exploitative practices are uncovered and societal expectations change.

Indeed, the pandemic creates the opportunity for employers and regulators to rethink employment benefits broader employment protection. ASI is walking the talk by rolling out strong engagement plans promoting workforce diversity and inclusion, living wages (where affordable) and embracing a culture of more flexible working.

This engagement is beginning to bear fruit. A number of companies are responding positively by providing new support to workers, including more flexible working patterns and more extensive paid sick leave (chart 1).

Chart 1: Employee support provided during Covid-19 pandemic

Source: Just Capital (April 2020).

Job losses and staff redeployment

With industries under extreme financial pressure as a result of social distancing measures to limit the spread of coronavirus, many businesses are facing difficult labour management decisions.

In the US, more than 30 million people have already filed for unemployment insurance, while trade groups have estimated that 1.7 million people working in retail, up to 5 million in restaurant roles and 4.6 million in the travel industry could lose their jobs.7 Elsewhere world job losses will not be as significant because of greater employment protections or schemes to subsidise furloughing, but the labour market fallout will still be significant.

While job cuts and restructuring are unavoidable during difficult economic times, we encourage companies to retain as many people as is consistent with their near and long-term viability.

Even more importantly, broader employment rights also should be safeguarded. Some firms have unjustly terminated contracts, asked employees to take unpaid leave or accept pay freezes. Where layoffs are necessary, these should be conducted in accordance with applicable laws and must be transparent and non-discriminatory.

Inequalities and human rights

Amid the health and economic fallout from the Covid-19 pandemic socioeconomic classes are not being affected equally. The US Bureau of Labour Statistics found that half of university-educated workers are able to work from home, compared to just 13% of those with a high school diploma.

The skill distribution of different types of jobs is equally significant. Low -skilled delivery drivers, supermarket workers, and warehouse workers are classed as key workers. However they are also more likely to be impacted by job losses (chart 2).

Chart 2: Share of US jobs that are vulnerable by income (Income Brackets)

Source: LaborCUBE; McKinsey Global Institute analysis (as of April 2020).

Likewise, the pandemic and lockdowns are not affecting the genders equally. The UN has highlighted that women are suffering more of the effects of the crisis. That is because they are more likely to be daily wage earners, small-business owners or work in informal sectors. As a result, women have a higher chance of being left in a precarious financial positon.

While some of this is unavoidable, investors do have a role to play in making sure that the employment decisions and work practices of companies take their impact on vulnerable groups into account, mitigating the effects where possible.

Beyond the crisis’s effects on health, employment and inequality, it also throws up human rights challenges. Many marginalised communities are suffering due to loss of livelihood and lack of food, shelter, health, and other basic needs. In addition, the enforcement of new lockdown rules has enabled human rights abuses in some regions7. The UN has publicly stated that ‘emergency declarations based on the Covid-19 outbreak should not be used as a basis to target particular groups, minorities, or individuals’.

Businesses can assist these underserved populations by helping them to access limited resources8 and of course avoiding any abuses themselves.

Securing supply chains

In a highly integrated global economy, many companies ability to produce goods and service their customers has been interrupted by disruptions to international supply chains.

On the basis of our ESG investment research and company engagements, we are encouraged that in general, executive teams closely track their tier-1 suppliers. But many companies only have a surface-level understanding of where their supply chains are located, the associated risks, and how to address them.

For example, the tech sector relies heavily on components produced in China, yet only 12% of tech companies demonstrate an effective supply chain management system according to Sustainalytics7. The supply chain disruption during the pandemic should push executives to improve their supply chain management. It should also be a focus point for our company engagements.


The final stop on our whistle-stop tour of the ESG implications of the Covid-19 crisis is the ‘G’ factor – governance. The current pandemic throws up myriad challenges for boards and executives as they manage their way through the crisis. Effective, ethical leadership and stakeholder management is therefore critical for firms wanting to emerge on the other side of the crisis with their reputations intact and perhaps enhanced.

Proxy voting season

One key consequence of the crisis has been the way it is constraining normal methods of holding corporates to account. For example, many annual shareholder meetings have become closed, or exclusively virtual, while others have been postponed altogether.

Although many shareholders take issue with such virtual meetings, believing it lowers accountability and transparency, such changes are unavoidable for now. Companies should, however, restore normal practices when it is safe to do so and in the meantime invest more in technological solutions that make virtual meetings more effective.

Executive pay

The current crisis is naturally shining the spotlight on executive pay, with social expectations dictating that companies’ leaders share the pain when much less well paid staff are suffering and so many people are losing jobs. Some firms have responded by cutting board pay while many CEOs have taken voluntary pay cuts. As an example, Taylor Wimpey announced a voluntary 30% reduction in base salary and pension for its executive directors during the government-imposed lockdown.

So what?

The Covid-19 pandemic has highlighted what responsible business practices mean means for companies, their employees, customers and the communities they serve. For ESG investors, the crisis has exposed a series of risks and shown that the ‘S’ in ESG is at least as important as the ‘E’ and ‘G’.

However, it will also generate numerous ESG opportunities. These include more cost effective ways to reduce firms’ carbon footprints, increased capacity to accommodate agile working practises that support diversity and inclusion, a greater recognition of the role that advanced health and safety regimes can play in mitigating and managing risks, and a deeper understanding of how important just employment practices are in creating successful businesses.

For now many investors are naturally focused on the difficult markets. But investors also have a vital role to play in ensuring that the symbiosis between corporate success, environmental sustainability, and social justice is reinforced by the crisis rather than weakened.




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Improving air quality amid a collapse in global greenhouse gas emissions has been one of the few positive manifestations of the Covid-19 crisis

Taking the long view

Chapter 3


Peter McKellar, Global Head of Private Markets

Public markets have rapidly responded to the current and potential impact of the pandemic crisis, displaying extreme volatility, particularly in the case of equities, but also in bonds and foreign exchange. How are private markets responding to the impact of the crisis?

Private markets are similar to public markets in many ways. Within private markets we invest in private equity, infrastructure, real estate, natural resources and private debt. Each of these asset classes are more or less exposed to growth, interest rates and inflation expectations of the global economy. They are subject to the same economic reality that we are all facing.

Crises can be the mother of invention, for example, companies founded during the GFC have gone on to be extremely successful.

Within Private Markets we are considering this crisis and its impacts in three stages: lockdown - where the world attempts to contain the virus; recovery - where we seek treatment and a vaccine whilst learning to live with the virus; and in the long run, seeking to identify the new normal.

The timeline for each period is currently undefined, which means we need to be alert, and in a position to respond as the environment changes. We are focusing on liquidity during the lockdown period, how to navigate the coming recovery as we exit lockdown, and how to position investments to suit the future new economic environment as it becomes clearer.

What are the impacts of the lockdown on private markets, and how is the current crisis accelerating existing trends?

Within private equity, managers have immediately moved to secure liquidity within portfolio companies. There have been certain first order effects on sectors such as travel and leisure, whilst other sectors have had a more mixed experience. The sophisticated sector specific operational expertise developed over the last two decades has been used to support management teams in dealing with the impact of the crisis.

We find that the pandemic is accelerating trends that were already in place pre-crisis. For example, the trend towards online retail has been magnified as consumers are forced to shop online, and not in a physical environment. We have been seeing the impact of this trend for some time on retailers and the commercial property they lease. Within real estate we see this play out in the struggle that retailers are having in paying their rent; conversely, logistics assets are much sought after. We are also witnessing the acceleration of online service usage in venture capital and growth stage private equity, where portfolio companies have benefited from the need to dramatically reduce human contact.

Real estate valuations are currently uncertain, and agents are unable to provide valuations upon which NAVs can be struck. There are very few transactions occurring, magnified by the fact that investors cannot travel to perform due diligence on potential investments. As a result, there is limited liquidity within the market.

In addition, income collection has fallen over the period as the economic impact reduces revenues of tenants, meaning that rents have been deferred in some cases. The leisure sector, including hotels and restaurants, has been the most severely impacted by a confluence of events: high operating costs whilst occupancy and customer footfall remains very low.

There has been less impact on concession infrastructure, which usually remains in operation irrespective of the economic climate, and is underpinned by government contracts. These are defensive investments, and have been the least impacted of all private market investments during the period. From an economic infrastructure perspective, any asset that relies on through-traffic or volumes to generate income may be impacted by the current lockdown. Where assets are essential to the national interest, the government may have to step in with financial support.

Chart 1: Public vs Private Asset Class Performance

Source: Source: Bloomberg, Barclay, MSCI, Cambridge Associates, Edhec, Aberdeen Standard Investments (as of 2019).

Private Equity, Buy Out and Growth Equity Index are horizon calculation based on data compiled from equity funds.

What has performance in private markets been during the period?

Some private market asset classes use leverage, which can leave them more vulnerable than other investments in times of financial and economic crisis. Credit markets have been stressed, and little new lending is being originated. Policy makers are seeking to avert a credit crisis which has relieved some of the pressure.

Unlike public markets, there is no real-time pricing available due to the private nature of the investments. Private market investment returns are typically less volatile than public markets as a result of infrequent pricing. In addition, unlike public markets, valuations are contingent on what could be achieved in an orderly sales environment. As a result, private markets tend to lag public markets in timing.

We can look at previous recessions to understand how valuations may evolve. Studying returns during the global financial crisis (GFC) of 2008, we can see that private market valuations dipped, but not to the extent that public market valuations fell. Private markets do not tend to see the same capitulation that public markets do, and in private markets we usually have more time to undertake due diligence. Moreover, during the GFC, private equity and venture capital were under-exposed to banks and other financial services and natural resources; currently, they are over-exposed to healthcare, consumer and business services and technology.

What will happen to "dry powder" (cash awaiting investment)?

Over the last few years the amount of investor capital committed to private market investments that is yet to be invested has grown dramatically. There is circa $2.6 trillion in private markets awaiting investment. There is some concern among investors that capital will be called to invest at an unsustainable rate, as private market investment opportunities present themselves at the same time as the value of asset allocators' public market investments has decreased substantially. Asset allocators may be suffering from what is known as the "denominator effect". This is where private market investments become a greater proportion of the asset allocation by virtue of public market investments shrinking.

However, history shows us that there is likely to be a drop in the proportion of money invested during a period when public markets suffer. Whilst this might seem paradoxical, deal making tends to be depressed during periods of recession.

In fact, Preqin, a private markets data provider, shows how historical cash flows and projections of a potential future economic environment can help investors to anticipate what capital calls and distributions might look like in the future (see chart below). Similar to the GFC-period, there is likely to be a dearth of investment opportunities over the coming quarters as potential sellers avoid selling assets wherever possible, projects will be delayed and developments put on hold. Purchasers will be naturally cautious about buying until there is some clarity around the trading and finances of targets. Lack of credit formation also presents a major hurdle to deal making during the lockdown period.

Chart 2: Net Cash Flows of 2017 - 2019 Vintage Private Capital Funds

Source: Prequin, FRG, Aberdeen Standard Investments (Dec 2019).

When will capital be deployed, and what are the return expectations?

As soon as some stability returns to the market, and lenders are in a position to provide capital, a more normal transaction environment is likely to resume. In the meantime some investments will need to be recapitalised, and a proportion of committed capital will be allocated to cover this. Private markets have accumulated a considerable dry powder over recent years. Whilst the current crisis will have an impact on transaction volumes, over the short to medium term opportunities to deploy cash at compelling valuations will be revealed.

Over time, particularly during the post-GFC period, we observed the illiquidity premia in private markets compress. We saw this in property yields, illiquidity premia as measured by direct alpha in private equity and the discount rate for infrastructure projects, all of which have compressed over time. The reduction in illiquidity premia has been mirrored by the reduction in risk premia in listed markets: compressing term premia in fixed income, falling equity risk premium and ever tightening spreads in credit markets.

Clearly, many risk premia have increased dramatically as a result of the impacts of the pandemic. We expect illiquidity premia to increase over the coming quarters due to the uncertain economic environment, and the resulting volatility in income, corporate earnings and valuations. The return on capital committed in the coming years is most likely going to be higher as a result.

For example, within real estate, we expect certain assets that had been struggling to perform, but that have been too expensive to redevelop historically, to become available for investment. There may be opportunities to redevelop certain assets, such as out-of-town shopping centres into alternative uses.

Similarly, companies that had previously been considered too expensive to buy will become attainable. With much of the due diligence already done, these assets could change hands more rapidly than currently anticipated.

Chart 3: Inovation persists in turbulent times - Examples of Companies founded in 2008-2009

Source: Aberdeen Standard Investments.

Planning for the future new economic environment

The future economic environment is yet to become clear, and as we move through the recovery period we will be constantly analysing the situation in order to understand how to best position ourselves. However, the secular trends of capital formation occurring outside of publicly traded markets, and of companies staying private for longer, are likely to be reinforced by the current crisis. In the context of investing, private market investment in its current form is a relatively nascent trend. The concept of private equity began in the 1980s, whilst stock markets have been in operation for hundreds of years. With the advent of the internet it became a lot less capital intensive to start and operate a business.

In the case of venture capital and growth stage private equity, whilst the exit route has changed for these privately held companies, the institutional demand to access high growth investment opportunities remains. In fact, crises can be the mother of invention. For example, companies founded in 2008/09 have gone on to become extremely successful (see chart 3 above).

Where an IPO was once a favoured exit route, large corporations and listed asset managers have provided exit opportunities. Often these private companies are technology or healthcare focused. It seems likely that these companies will continue to be attractive future investments, and that this secular trend will remain.

One question we are asking ourselves is how fiscal policy will evolve, and to what extent the relationship between governments and the private sector will change. The role of private capital in infrastructure spending should grow as the required capital investment around the world remains high. At the same time policymakers may be more inclined to pursue long-term fiscal spending plans to boost productivity.

Investments in timber and agriculture can offer investors a long-term inflation hedge. While this may seem unnecessary now, this type of investment could play an important future role if fiscal policy goes on to become a dominant force.

As private markets have developed there has been increasing regulation and oversight. At the same time, the clarity of approach to addressing environmental, social and governance (ESG) issues has improved. There may be more regulation in private markets as governments are forced to step into every area of the economy. Because the investor base has changed over time, and is predominantly institutional, there may be calls for greater transparency, similar to that which we see in the more heavily regulated financial services areas.

The requirement for diversification and return generation in the face of very low interest rates and extreme volatility in listed equities is probably reinforced by recent events. As financial markets and returns within them are hollowed out by the current crisis, clients are likely to need to create diversification within their portfolios, and take on private markets exposure. They will need to demand a suitable premium for locking their money up, however. The current cyclical downturn is likely to create compelling opportunities within private markets. The secular trends that have been highlighted above also remain in place, and we expect private markets to continue to grow as a share of total investable assets.



Crises can be the mother of invention, for example, companies founded during the GFC have gone on to be extremely successful.

The calm at the
eye of the storm

Chapter 4


Devan Kaloo, Global Head of Equities

The scale and pace of the fallout from the Covid-19 virus is unprecedented, and markets have struggled to price this. What should investors focus on and what companies should they look for?

Eye of the storm

It all seemed so different at the start of the year. At the end of 2019, both the US Federal Reserve and the Chinese Central Bank were easing and the two countries had reached a trade deal that boded well for accelerating global growth in 2020. Today we are in the midst of a bear market and the outlook is far from certain.

Looking forward, investors need to consider the timeframe to return to normal levels of activity

Chart 1: All fall down, developed markets fall as do...

Source: Bloomberg (as of March 2020).

Chart 2: ... Emerging Markets, only A shares have held up

Source: Bloomberg (as of March 2020).

Chart 3: COVID-19 Cases spiked...

Source: Bloomberg, CLSA Equity Research (as of March 2020).

Chart 4: oil price war started...

Source: Bloomberg (as of March 2020).

Chart 5: ...and markets were gripped by fear...

Source: Bloomberg (as of March 2020).

All charts are for illustrative purposes only. No assumptions regarding future performance should be made.

What’s happening?

The outbreak of Covid-19 in China and the subsequent pandemic, leaving no region unaffected, has resulted in a fast-developing human and economic crisis. Investors’ have had to equally rapidly revise their expectations as the situation has developed.

We remain in the early stages of this crisis. However, incoming data is consistent with a global recession that will be deeper, but hopefully shorter, than the GFC. This is largely driven by the unique nature of having to balance both the health and economic impact of this crisis.

Firstly, given the collapse in demand as countries have mandated lockdown to contain the virus, markets are struggling to price future earnings. The size and length of impact is hard to quantify, as countries have taken different approaches to containment. Stimulus measures differ too, in terms of scale and timing. Secondly, while acknowledging the benefits of lower oil prices for consumers, the collapse in oil demand and prices has compounded concerns for oil-dependent economies. It has also hit oil companies, their supply chain and creditors – putting at risk entire industries. The third issue relates to liquidity and comes in two parts: countries and companies requiring access to financing; and consumers and companies facing greater solvency risk driven by the collapse in economic activity.


Governments and central banks have responded with significant “bridging” stimulus. This, combined with infection rates peaking in certain countries, has led to some markets experiencing a rebound. Looking forward, investors need to consider the timeframe to return to normal levels of activity, potential second-wave infections and their severity, and subsequent policy responses.

Whether the recovery is V, U or L shaped, our focus in the short term is to appraise companies’ ability to survive a prolonged period of lower activity. We are also assessing their capacity to cover their cost of debt and access the required funding to continue operating. Looking to the future, our analysis aims to understand current business models’ ability to continue to prosper. Additionally, we are evaluating whether we should give greater consideration to potentially new or accelerating structural trends, the competitive landscape, capital structures, government intervention and the consequences of de-globalisation.

Chart 6: Relative to history and other market, EM is cheap

Source: Bloomberg (as of March 2020).

Although equity markets fell initially in line with a typical bear market of c.35%, they have since bounced. However, we are yet to see the consequences of a near global lockdown. As such, a bear market in the context of a recession (where the historic average peak to trough has been -43.6%) should be considered. While we note the potential for further downside in risk assets, markets have rebounded in April, with a wide dispersion evident across countries. Chinese equities have shown a degree of resilience, linked to the fact that the country was first into the crisis and at the forefront of the way out.

We continue to learn more via ongoing company contact and the release of crisis-impacted economic data. It remains to be seen though if the rebound is a bear-market rally or a longer-term floor. Historically, bear market returns have tended to fall at least as much, if not more, than earnings. Therefore, investors are currently grappling with a lack of visibility. This is because companies have yet to update their guidance or, in many cases, are withdrawing guidance, leading to further risk of negative surprises.

What is clear is that there is a reasonable variation in top-down versus bottom-up earnings expectations for 2020 of between a 30% and a 10% drop respectively, as individual company guidance lags macro indicators. Thus, in the near-term, a degree of caution is required. However, on a longer-term view, these bouts of volatility historically have been shown to be attractive entry points for a patient investor.

It’s about the companies

The unprecedented speed of this crisishas created significant volatility and uncertainty. We have experienced numerous crises in the past and know it is important to focus on company fundamentals. We must analyse and engage with our companies to ensure that they have the ability to survive and are positioned to prosper, as trends both materialise and accelerate. These may include the continued rise of e-commerce and change to shopping habits, demand for technology and the ability to work from home, increased focus on ESG and the shift to renewables, to name a few.

Equity investors, lenders and governments all have a role to play in supporting good businesses through this difficult time. Companies have a responsibility to do the right thing by all their stakeholders. Not just investors, but also customers, suppliers and employees.

It will be difficult to predict the timeframe to recovery, but if one can focus on the fundamentals of companies and extend their investment horizon then equity markets are a worthy consideration for an increased allocation.



Looking forward, investors need to consider the timeframe to return to normal levels of activity

“There are decades
where nothing happens...

Chapter 5


Luke Hickmore, Investment Director (Credit)

...and there are weeks where decades happen” (Vladimir Lenin). In March, spread levels retraced to the summer of 2012. April reversed some of this – but where should investors look for opportunities as we move closer to a relaxation of lockdowns?

Duration or credit?

There is currently no need to choose between what in normal times would be considered as polar opposites. Central banks are buying everything bond-related – government bonds, investment grade, sub-investment grade, loans and mortgages.

Chart 1: Average total return in USD since 2015 (% p.a.)

Source: Bloomberg, MSCI IPD, Aberdeen Standard Investments; February 2020.

For illustrative purposes only. No assumptions regarding future performance should be made.

Don’t be a central bank – eventually

Central banks have very different reasons for buying these assets than other investors. In part, they are motivated by a desire to provide liquidity where it has become scarce. The bank runs of the 1700s and 1800s, and, indeed in 2008 (remember Northern Rock) may now be a thing of the past. Today’s equivalent of the ‘bank run’ is actually a run on markets generally where savings have found a home, rather than staying in low- or negative-yielding bank accounts over the last 10 years.

Buying alongside central banks in credit markets is probably a good choice for investors at the moment. However, the need to be selective in what you buy has never been more important. A central bank may buy a company that needs support today, but has little to attract the long-term fundamental investor of tomorrow. We are most interested in those companies that will be good tomorrow.

Investors looking for opportunities in western markets should focus on companies that are set to benefit from the infrastructure boom that is coming down the pipeline. But even here, there is a large difference between those companies who are exhibiting balance sheet strength now and those who have been stretching their balance sheet to just be in tolerance with their ratings. We like CRH, Lafarge or Martin Marietta in the US. All these companies should have strong end markets when we emerge from the current turmoil, as well as good liquidity profiles.

It is important to remember that when the central banks stop their buying programmes, and as the market adjusts to a large relatively un-fussy buyer leaving the field, we should anticipate a whole new bout of volatility. But finding opportunities which the central banks are not buying now is also important.

Banks, banks and more banks

It can feel like a stuck record when we continue to recommend banks and insurance companies as sound corporate bond investments. But it is worth re-emphasising that the global financial crisis of 2008/9 led to regulators forcing the financial sector to improve its balance sheets dramatically. This time around the improvement is there to be seen. True, their quarterly numbers are likely to be poor – and dividends are being cut to zero in many cases. But the quality of their balance sheet reserves is excellent. These reserves are so good they are being used as policy tools by governments to help smaller companies get through this economic crisis. In addition, they have benefitted from significant liquidity measures. With many banks’ senior bonds trading at spread levels above corporate bonds of the same rating, we see a plethora of good choices in this space.

Not just the good but the bad are set to get better

Rising stars are an area of increasing focus for us. Many issuers will become ‘fallen angels’ during this prolonged period of economic strain. But if you can spot the rising stars, that is a great source of alpha. Take, for example ZF Europe. This is a key player in the automobile supply chain, after the acquisition of Wabco last year, which now looks mistimed, ZF Europe was downgraded to sub-investment grade. It wants to return to investment grade and we think it will, given its strong business profile and liquidity management.

We are also expecting a broad improvement in balance sheet strength coming out of this crisis. Over the next decade, we expect corporates to improve their financial resilience much as banks have over the past 10 years. Many companies are now sub-investment grade, due to the leverage their owners have imposed on what are essentially sound businesses. Such companies are likely to find it a better environment to be in investment grade where there are more government support mechanisms going forward.

Companies such as Ineos, which has plenty of liquidity right now and relatively low leverage for its BB+ rating, can weather a potential 25% cut in revenues this year. Going forward, it could be tempted to improve its balance sheet.

Even Telecom Italia could be tempted back to investment grade status (depending on where Italy ratings go on Friday). For once management looks stable, shareholders have stopped arguing and relations with the Italian state have improved.

Head East for quality

Asia offers a wealth of opportunities. Sovereigns have spent the last two decades since the SARS outbreak improving fiscal prudence. This has given them more space to react to 2020’s pandemic economy, and this is a large benefit. This prudence also spilled over into corporates, leaving many in the area with better balance sheets than their similarly-rated western peers. Aberdeen Standard Investments’ Singapore office thinks this is the best entry level for many of these opportunities for a decade. They are seeing real estate companies in China that are offering deep value; Malaysian energy groups issuing new debt at attractive levels; and Indian heavy industry groups with stable-to-improving credit profiles that are priced as if they are on the cusp of sub-investment grade.

Crisis? What crisis?

Not all is rosy of course. The depth of the economic slowdown we are in, and the impact it will have, is changing every day. There will be plenty of companies that do not make it (or should not make it). There may be many downgrades, and sovereign issuers whose ratings cut due to sudden and large increases in fiscal spending. But a focus on fundamental strength and a conviction on an issuer’s future prospects should lead to strong returns for credit investors who have the global platform to help identify attractive opportunities.




The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.

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