By Ninety One.
IM|Power Online's headline partner, Ninety One, writes on the varied implications of Covid-19 in their new series of thought leadership examining the issues that matter in a post-pandemic world.
Since we started in ’91 in an emerging market, we have harnessed the power of active management when investing for a world of change. It’s given us a different perspective on the issues that matter. Our Great Shutdown series by the Ninety One Investment Institute has investigated the medium-term implications of the pandemic for markets. These can be grouped in three conceptual categories: forks in the road, accelerators, and equalisers.
COVID-19 is a clear fork in the road for some trends, like debt sustainability and the evolution of the international monetary and financial system, posing deep questions about their viability and future prospects.
For other trends, COVID-19 is an accelerator, bringing forward transformations already underway by a number of months or years. We concluded that the future of globalisation and the future of work would involve an acceleration of current trends.
Then, in the context of certain kinds of competition or inequalities, the pandemic has reset the terms of engagement and created a new landscape quite different to the one that existed before. In this sense, COVID-19 is an equaliser, not just for the relations of citizens to each other, but also the relations of governments to the private sector.
• Fork: Dealing with the debt burden.
COVID-19 is a fork in the road, posing choices to governments about how to stabilise debt. The unprecedented policy action from governments globally to cushion the virus impact has led to significant extra debt being added to already high levels. Heaping on debt in a time of crisis is not unusual, and is common in wartime, but it will need to be repaid eventually. Most options to reduce this burden are unlikely, unpopular or unrealistic. But financial repression—the capping of bond yields via central bank yield curve control, regulations that require the financial sector to hold more government bonds and keeping real yields negative—is the most likely outcome. Read more.
• Accelerator: Will the pandemic spur deglobalisation?
COVID-19 will largely accelerate the pre-existing trend towards regionalisation (rather than ‘de-globalisation’ per se). While the crisis has demonstrated the danger of international, highly concentrated, just-in-time supply chains, and will prompt decoupling in key areas like pharmaceuticals and technology, the fact is that cross-border trade has been organising itself along regional lines for many years. That is now likely to continue and even accelerate because regional trade is much less contentious than global trade. Moreover, new types of digital services (like tele-healthcare) have seen a positive shock. With previously local work able to be done globally, there would be a tailwind behind the international services trade. Read more.
• Fork: Under pressure: The international monetary and financial system.
The international monetary and financial system (IMFS) is at a fork in the road. Whether by evolution or revolution, change is inevitable—it is now at least twice in the last 12 years that the system has appeared unbalanced, fragile, vulnerable. The possibilities are wide ranging. The rift between the US and China may widen further, with the current US dollar-based system splintering into a multi-polar world with economies aligned to either a US dollar or a renminbi-based system. A new central bank digital currency may disrupt network externalities that prevent the incumbent global reserve currency from being displaced. More hopefully, a new spirit of cooperation may emerge to stitch together a new IMFS, in the spirit of the Bretton Woods model, however difficult that may be to imagine today. Read more.
• Equaliser: The Return of the State?
COVID-19 is an equaliser, augmenting the importance of the state in relation to the business and private sector, and reorienting political focus towards inequality and wages. Government intervention in economic and everyday life has occurred with unprecedented speed and reach. Previously unthinkable policies have become the accepted, common sense solutions to new problems, fundamentally altering the way governments approach public health policy, resilience planning and surveillance.
Burning issues around inequality, employment practices and the role of the corporation in society have also been thrown into sharp relief by the uneven way in which the impact of the crisis has been felt. There are complex policy decisions to be made in all of these areas but in each case, the most readily available remedies involve an expanded view of the role of government. Read more.
• Accelerator: The digital economy and the future of work.
COVID-19 will accelerate the pre-existing trend towards the globalisation of services. The concept of an office as a place requiring the physical presence of labour was already being eroded.
First, online freelancing platforms have come of age, making it cost efficient to pair labour requirements and labour supply at reasonable cost.
Second, machine translation services are now readily available, broadening the accessible talent pool.
Third, communications infrastructure can finally facilitate, rather than frustrate, a more connected world, via emerging technologies such as augmented reality, virtual reality, and holoportation. The implications for white-collar workers, commercial real estate, and the digitisation of services are profound. Within a decade our current world of work could look unrecognisable. Read more.
All this clearly affects markets, especially over the medium term. For some themes, particularly the forks in the road, the outcomes are quite binary. They depend on the choices taken by decision makers today. For accelerators, the outcomes will play out much sooner. For the equalisers, the answers could take longer to play out because they depend on transforming typically slow-moving social variables, though it is also true that social change can also happen very quickly.
What is clear is that recessions or crises of this magnitude have typically led to a regime shift in at least one major asset class. The first oil shock of 1973 and the recession it spawned ended the Bretton Woods system, gave rise to floating currencies and introduced exchange rate volatility that had not existed for decades.
The structural decline in inflation that followed two back-to-back US recessions in the 1980s led to a four decade-long rally in government bonds. Meanwhile, the low-rate environment following the 2001 recession underpinned the interlinked bubbles in commodities, China and emerging markets.
Similarly, the low rate environment in the decade following the 2008-09 both reflected and facilitated lower trend growth globally. Growth in developed economies was led by the US against a backdrop of sound bank balance sheets and independent US energy policy—all of which was reflected in the strength of the US dollar.
A persistently low interest rate environment underpinned the returns to private equity, high quality companies and the continued growth of the digital economy, reflected in the returns generated by tech companies globally.
What will the next regime shift look like? Find out.
About Ninety One
Established in South Africa in 1991, as Investec Asset Management, we started offering domestic investments in an emerging market. In 2020, almost three decades of organic growth later, we demerged from Investec Group and became Ninety One.
Today we offer distinctive active strategies across equities, fixed income, multi-asset and alternatives to institutions, advisors and individual investors around the world. Our journey taught us to see the world differently, to recognise and embrace change and uncertainty. Find out more.
All investments carry the risk of capital loss.
This communication is provided for general information only should not be construed as advice.
All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. All rights reserved. Issued by Ninety One, issued April 2020.