On the basis that the coronavirus crisis will end and there will be a recovery, what form might it take and how might markets and economies have changed? Anthony Rayner, multi asset fund manager, Premier Miton takes a view
One of the common questions currently being asked by investors is, what will the shape of the recovery be? Indeed, much has been written about the likely bounce back in economic activity, for example, whether it will be V, U, W or, indeed, L-shaped.
Visibility around economic activity is low, but increasingly, the comparison is not to the GFC (2008), which was material, and was also a systemic crisis, but all the way back to the Great Depression. Even that maybe misses the point that this is not a normal recession, in that human and economic activity has been stopped by governments. The duration, degree and exit are all uncertain, as is the degree of permanent damage. There will no doubt continue to be some very poor economic data releases in the coming months, but neither from these, nor from the forthcoming first quarter earnings season, should we expect much better visibility.
Importantly though, the narrative around the shape of the recovery often makes an important assumption: that things will eventually return to how they were, the only real doubt being the timeline. We think this misses a key dimension: many things will be permanently changed, in large part because the impact and subsequent response to the virus have been so substantial.
Starting off at a government level, there are some important questions around how the social contract might be impacted. One of the previous working assumptions in the West was that the state, and the market, extends mutual protection and welfare to its citizens. However, the limitations of a dominant free market and small government have been highlighted by the recent crisis. A strong and larger government is not only less offensive, it is suddenly socially acceptable. Contrast this with the oft-quoted Reagan in the midst of the early recession in the 1980s, “In this present crisis, government is not the solution to our problem; government is the problem”. Let’s not forget, that period heralded in the Reagan/Thatcher axis that saw neo-liberalism as the triumphant model for decades.
Similarly, in recent times, more liberal Western democracies have in many ways fared less well than more authoritarian models such as Singapore. Security and health are now understandably more valued than civil liberties. For example, increased state surveillance is suddenly more acceptable in the West, albeit more subtly than in societies like Russia and China. Increased control can also be seen at a policy level, with policy makers now not just managing their yield curve but also increasingly managing parts of their economies. In all areas, once the crisis subsides, we suspect most of these new powers will not simply be handed back.
More fundamentally perhaps, there will be an impact on values. For example, society has been reminded of the importance of collectivism versus individualism. Take the seemingly new term “key workers”, which immediately elevates nurses, farmers, food retail employees, carers, etc., areas which have arguably been undervalued over recent times. Similarly, the value of the NHS has been reaffirmed as an important part of the overall social contract between government and their citizens.
In a very short period of time, socially acceptable words are now “nationalisation”, “strong state” and “Universal Basic Income”. Likewise, socially unacceptable words are “redundancy”, “privatisation” and “paying dividends”. The rules have been broken, ironically perhaps, by the rule makers.
The anatomy of economies is also being impacted. In certain cases, recent events accelerated forces that were already in play. For example, digital is thriving versus analogue, take Google or Zoom versus the travel industry. Similarly, monopolies are generally faring much better during the economic lockdown, drawing on their larger resource.
We are just starting to understand how things are changing, but in a very short space of time many previously sacrosanct rules have been discarded and larger government and monopolies have an advantage, as do tech-related sectors. As a result, large cap tech seems like a good place to be, as it was pre-crisis. Meanwhile, government bonds are faced with ever more debt, though it’s not clear whether that makes them more precarious or if there is safety in numbers, with increasing numbers of governments owing previously unacceptable amounts.
