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Recovery From COVID-19 - What Wealth Managers Say

Editorial Staff

14 April 2021

Lockdowns are easing in some countries (such as the UK) and certain nations have been – so it is claimed – ahead of others in tackling the COVID-19 pandemic and moving back towards more normal times. Predicting how this plays out isn’t easy, and the twists and turns of vaccines and policy responses create uncertainties that challenge asset allocators. With that out of the way, here are some wealth managers’ views of the economic situation.

Michael Grady, head of investment strategy and chief economist at Aviva Investors
Given our strong growth expectations, as well as the balance of risks, we prefer to be overweight global equities, especially in US and UK markets. We are modestly underweight emerging market equities because of the anticipated headwinds from higher US bond yields, weaker local currencies and tighter domestic monetary policy.

Higher sovereign bond yields largely reflect the brighter economic outlook as well as increases in public borrowing. Central banks maintaining rates near the effective lower bound will keep the short end of yield curves anchored, but there is scope for longer-term yields to rise further. As a result, we prefer to be modestly underweight duration.

The upside from tighter credit spreads appears to be more limited, given the narrowing that has already taken place, so we prefer to be slightly underweight. We are mostly neutral on currencies, with the previous mildly negative view on the US dollar now more nuanced, given the more rapid growth trajectory expected there compared with other regions.

Keith Wade, chief economist and strategist, Schroders
There is a distinction to be made between recessions caused by external shocks and those which are endogenous or internally generated - the former tend to see faster recoveries than the latter.

The current downturn is very much an exogenous shock as the COVID-19 pandemic stopped the world economy. In this respect it is similar to a war, where daily economic activity is brought to a halt and all attention is focused on the more pressing battle for survival from the external threat. Once the “war” is over, the economy should quickly normalise as the threat is lifted.

In our current forecasts, we see activity returning to pre-pandemic levels in Q2 this year in the US and Q4 next year for the UK; periods of one and two years respectively. The shorter downturn should mean fewer long-run effects where workers lose skills and become permanently unemployed, known by economists as “hysteresis.”

However, the pandemic has created significant imbalances. The impact on government borrowing has been enormous. Figures from the IMF show public debt in the G20 advanced economies to be at levels last seen after the Second World War.

The new US Treasury Secretary Janet Yellen has talked of the need for fiscal policy to “go big” to prevent a repeat of the post global financial crisis (GFC) recovery period, even if it risks higher inflation. The IMF and World Bank have both been vocal on the need to keep fiscal support going.

In our view, such a position makes sense, but we should recognise that it will have to be accompanied by an extended period of low interest rates to be sustainable. At this stage, we would note that fiscal dominance of monetary policy is becoming the new reality.  

We assume that the pandemic ends and the virus becomes endemic; always with us but not the same threat to everyday life. The strong performance of the industrial sector through the pandemic means that the focus will be on recovery in disrupted sectors such as retail, travel, accommodation, arts and entertainment.

Although we acknowledge the uncertainties around this, we are more optimistic. More generally, lessons learnt from the GFC mean that we are not experiencing a systemic liquidity or credit crunch and the authorities recognise the need to keep monetary and fiscal policy support in place. Recovery should be faster as a result, limiting the ultimate impact on trend growth.

Although there are still considerable uncertainties over the path of the pandemic and the global vaccine roll-out, these factors point more towards a brighter path for the world economy than experienced after previous recessions.

The Global CIO Office
We continue to believe the bias of risk in global inflation is to the upside in the coming year. Economists struggle to make confidence judgements when there are so many shifting variables. However, the scale of government spending and the degree of pent-up demand in the global economy could converge to bring a surge of growth that sends inflation spiralling higher. Supply lines still seem disrupted, pipeline inflation is prevalent in many commodities, and consumers may be more willing than before to pay up to consume. Add to that the fact that inventory to sales ratios globally are low. When companies are running low inventories and see a surge in demand, higher prices are very likely.

Equities have maintained their strength so far in the second quarter, with both US and eurozone equities at new highs. We continue to believe that value stocks offer a better way of accessing future equity market performance. The value stocks versus growth stocks trade still seems valid given that we have only just started to unravel ten years of underperformance. Higher inflation plays into the hands of value stocks, given that their profitability is more dependent on nominal GDP growth.

Kristina Hooper, chief global market strategist at Invesco
The IMF upgraded its economic outlook: The IMF now expects the global economy to grow by 6 per cent in 2021 - the highest level of growth since 1980. This is an upward revision from its previous estimate in October of 5.5 per cent growth in 2021 for the global economy.

Eurozone PMIs point to improvement: The final eurozone composite Purchasing Managers’ Index (PMI) reading for March was 52.5 versus 48.8 for February. More important was the final services PMI reading for March: 49.6 versus 45.7 in February. We saw significant improvement in a number of countries including Ireland, the UK, and Germany. The Fed remains accommodative: The minutes from the March meeting of the Federal Open Market Committee (FOMC) released last week implied that it is expecting a brighter economic outlook, but wants to remain very accommodative.

The big news is that the yield on the 10-year US Treasury backed down materially last week. This came as a surprise to many, given that the outlook for the economy continues to improve - as have expectations for inflation. Stocks in general made gains last week, but technology stocks and other more growth-oriented stocks - as well as larger-cap stocks - assumed positions of leadership

I would expect a continuation of this trend: rotations in leadership tied to changes in the 10-year yield. Despite last week’s downward moves, I expect the yield on the 10-year US Treasury to reach 2 per cent or higher this year.