Finding a way through
There is no doubt that the Covid-19 crisis will have long-lasting and far reaching socioeconomic consequences. For investors, analysing these is a challenging process. The market environment remains uncertain and the path ahead is likely to be difficult to navigate. Yet despite all this uncertainty, global financial markets have largely marched onwards and upwards and economies look relatively resilient – for now at least.
March marked the low point for global stock markets, when they fell precipitously in the wake of the virus’s rapid spread around the world. At that point, economies went into lockdown to try to contain the pandemic.
Global equities suffered losses not seen since the 2008 financial crisis, as investors worried that we were heading for the worst recession in history. However, decisive action by global governments and central banks, combined with early signs of falling infection rates, helped restore investor confidence and settle nerves. Indeed, government and central-bank policy have provided a supportive backdrop for risk assets like equities ever since.
More recently, though, there are signs that the speed of the global recovery is starting to moderate. Renewed Covid-19 outbreaks and re-tightening of restrictions on social interaction have led to faltering economic indicators. As such, markets are moving at a more muted and realistic pace, punctuated by bursts of volatility. While the global recovery has not petered out completely, it does appear to be losing steam.
As a result, we have lowered our forecast for global economic growth in 2021 to 6%. This would leave global activity well below its pre-Covid-crisis trend. Our base case of a reverse-J recovery – a sharp contraction, reasonably sharp bounce back (though not of the same magnitude as the fall) and a plateauing – appears to be the path we are following.
Undoubtedly, the availability of an effective vaccine against the virus is critical for the near-term outlook. The latest news on this front has been heartening, with a small number of potential vaccine candidates now in the final stages of human trials.
In an unprecedented move, the European regulator stated that it will begin reviewing AstraZeneca/ Oxford’s data ahead of completion, to accelerate the approval process of its vaccine. Most positive of all are results from BioNTech/Pfizer and Moderna. Preliminary analysis showed that their vaccines could prevent more than 90% of people from getting Covid-19.
These encouraging developments provide some much needed hope. It is our base case that at least one vaccine will be approved by the end of this year, and almost certainly by mid-2021.
Politics play on amid the pandemic
Of course, politics don’t stop for a pandemic, and the final quarter of 2020 has not disappointed in terms of drama.
In the US, the presidential election did little to alleviate the polarised and hostile environment stateside. This makes political coordination on Covid-19 and further economic stimulus unlikely in the near term.
In the UK, meanwhile, with the Brexit transition period expiring on 31 December, the threat of a hard Brexit looms. In our view, a narrow free trade agreement is the most likely outcome, with zero tariffs on goods but significant non-tariff barriers to trade. But a no-deal conclusion is by no means out of the question.
Beyond these two pivotal events, the pandemic is likely to further fuel populist narratives and heighten political risk. Mainstream leaders face difficult choices about when and how to end lockdowns, managing further waves of infection, and how to phase out financial help. All these decisions pose significant risks to their credibility. For populist politicians, however, this presents opportunities to garner support. The human cost and unequal levels of economic pain inflicted by the virus, particularly on lower-income voters, is the perfect incubator for polarised and populist politics.
A chance to build back better?
Covid-19 has brought about radical shifts in working practices and lifestyles, as well as a growing focus on inequality. This is driving positive change and encouraging large parts of the global economy to improve how they operate. Many companies are starting to tackle their social and environmental impact head on. We are also seeing greater scrutiny around governance and how businesses are treating their staff during the crisis.
This makes good business sense. At Aberdeen Standard Capital, we have long recognised that how a company manages these ESG – environmental, social and governance – aspects of their operations can impact its performance. We believe those businesses that behave responsibly are more likely to deliver sustainable returns to investors and better outcomes for all.
The pandemic has presented us all with a once-in-a-lifetime opportunity to build a fairer, greener and more sustainable world. History will be watching.
Ending the year with some bumps
Covid-19 is unfortunately part of our lives, now and for the foreseeable future. Newsflow on infection rates and the economic fallout from the pandemic will continue to dominate headlines. This, alongside political pivot points up ahead, means we are prepared for a potentially volatile end to 2020. But despite the many uncertainties before us, we still believe that the outlook for financial markets is generally positive, albeit returns may be bumpy.This article was written in December 2020.