We set out a range of commentaries from wealth and asset management groups about how the economic and market position looks more than a year after much of the world began to enter lockdowns.
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,
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.