The economic aftermath of COVID-19 is difficult to judge, but whichever landscape we emerge into over the next 12-24 months will have fundamental impact on which are the most appropriate asset allocations and investing styles (which we will post on separately).
Simplistically we can expect one of four broad global economic landscapes:
- Deflation (US 2007-2009 or in extremis Japan 1990-2020 and US 1930s Depression);
- Stagflation (1970s economic stagnation with price inflation, in extremis hyperinflation);
- Inflation (hopefully 1990s high growth with controlled inflation);
- 2010s anaemic growth (low growth with low inflation);
In turn we find it helpful to consider some key emerging themes and the broad global economic landscapes they push us towards:
- Record low interest rates: Inflation or 2010s
- Record high unemployment: Deflation
- Companies suffering losses and negative operating cash flow: Deflation
- Emergency loans to backstop companies and furloughing policies to avoid unemployment: Anti-deflationary but not inflationary – as loans / guarantees / subsidies are being used to bridge losses (or revenue shortfalls) rather than finance investment / growth i.e. increased supply of money is offset by decreasing GDP and therefore reduced velocity of money)
- Balance sheet recession (corporates and consumers more cautious about their spending / borrowing, irrespective of lower interest rates): Deflation
- Quantitative easing: Deflation or 2010s. Precedents include Japan prior thirty years, US prior ten years, Europe prior ten years. These regions saw very limited real economy price inflation, probably due to a combination of dropping velocity of money, balance sheet recessions and dropping productivity
- Monetary financing of fiscal spending (central banks finance government deficits): Inflation with risk of hyperinflation (if fiscal and monetary levers cannot be effectively used to control inflation, and/or if balance sheet recession cannot be overcome)
- Reconstruction Programmes yet to be announced (i.e. Marshall Plan II): Inflation
- New social contracts including wage subsidies and improved compensation for healthcare workers: Inflation
- Accelerated digitalisation and automation: Deflation
- Deglobalization and shortening supply chains: short term inflation (production costs increase due to higher labour costs / input costs) but long term deflation (due to investment in automation to replace labour cost)
- Potentially delayed launch of treatments for Covid-19, combined with ineffective testing and contact tracing, leading to recurring waves of outbreaks and economic shutdowns (e.g. Hong Kong / Singapore / China): Deflation or Stagflation
We will explore some of these themes in further detail in future posts.
Sources: N/A