Global opportunities in a Pandemic

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US Markets

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In the US, rising coronavirus cases and deaths have raised questions over the strength of the US economic recovery. Economic indicators have begun to signal that business activity has slowed, investors continue to search for positive momentum in various sectors. Technology and healthcare have begun to show the most promise for patient investors.

 

On Friday, US payroll and unemployment numbers would be revealed. The unemployment rate is expected at 10.5% according to economists surveyed by Reuters. The prior rate was 11.1%, indicating marginal improvement for the month of July. That is; recovery from the record high of 14.7% in April 2020.

 

The apparent failure by the US Congress to reach a compromise by July 31st has left more than 25 million individuals in the world’s largest economy faced with sudden austerity, that could follow given the expiration of benefits worth $600 per week. Democrats wanted to renew the benefits at the same level until early 2021, but Republicans in the Capital resisted, arguing that new stimulus was not necessary and then pushing for much smaller payments, making it one of the biggest and most economically consequential debating items last week.

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The current stand-off is in sharp contrast to March and April this year when the White House and Congress rapidly approved $3 trillion in fiscal support to sustain the economy during the first lockdowns, helping support the US and the Global markets. Now the lack of a deal led to anxiety at the Federal Reserve. Fed Chairman, Jay Powell, has repeatedly urged Congress to offer more support for the economy.

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The median forecast of top US central bank officials predicts the US economy to contract by 6.5 percent in 2020, however, the downturn could be deeper if the stimulus is withdrawn. The US recovery would also negatively affect the global economy, which is expected to shrink by 4.9 percent this year according to the International Monetary Fund.

US economists have warned that unless a deal is reached on unemployment benefits, there could be additional job losses as businesses hit by a decline in consumer spending, further extending the human hardship.

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Europe

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In Europe, attempts to restart activity, arguably prematurely have led to an increase in coronavirus cases, where the pandemic previously appeared to be under control. A possible vaccine, if any seems a few months to a year away at best. Meanwhile, central banks may have little capacity to respond to a further downturn.

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Governments are counting the debt they incurred by keeping economies in operation through the pandemic’s initial stage. Whether in Hong Kong, Australia, Japan, Israel, or Germany, countries that appeared to have halted the spread of the virus are now having to deal with either a second wave nationally or sporadic regional outbreaks. Only far south New Zealand, which managed to suppress the virus internally and successfully distance from the rest of the world, has reached something approaching full normality.

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The damage observed already has been substantial. US growth figures released on Thursday pointed to the highest recorded decline in activity in the world’s largest economy. The 32.9 percent annualized fall in Gross Domestic Product in the second quarter was three times the previous postwar record. Europe is suffering, too. Its biggest economy, Germany, reported a 10.1 percent (absolute) fall in gross domestic product during the same period, the largest decline since the Federal Republic records started in 1970. Spain and France also posted weak economic data last week.

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Asia & Emerging Markets

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The spread of COVID-19 having slowed in recent months in certain emerging markets, the focus of policymakers has started to shift from the needs of the health sector towards the economy. Consensus suggests that a potential vaccine is at least one year away in the more optimistic scenario and in the interim countries will need to start operating again in a new way. The long-term and far-reaching economic consequences of lockdowns will also become clearer and need to be managed by policymakers and the business community. There is no clear template to follow in dealing with this crisis, but several factors have been shown to successfully drive containment.

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Decisive policymaking paired with effective execution has been crucial, alongside social cohesion and economic resilience.

In the emerging markets as we look to 2021 and beyond, we think these attributes will help countries get through the immediate crisis, while those economies and companies with sustainable comparative advantages will weather what is likely to be an extended period of weaker economic performance.

 

The case for emerging markets is that the crisis highlighted the strengths of these economies, whether in terms of their social, governance, and health care systems, or the fiscal and corporate reforms they have undertaken over the last two decades. Robust balance sheets across emerging markets have proven to be a source of resilience, and we believe that will continue. Before the full scale of the crisis became clear, the expectation was for China to deliver some of the largest fiscal and monetary stimulus among major economies. However, the developed world has turned out to be the biggest deployer of stimulus far exceeding what we saw in the global financial crisis and how this will eventually be repaid has yet to be worked out.

 

Stimulus in emerging markets has been more measured, in part due to lesser means in certain countries, while others have left room for further action. Policy support has been fairly limited in East Asian markets that have adeptly handled the pandemic, such as South Korea and Taiwan, while China has ample ammunition for further spending.

 

We have seen increased institutional resilience in the emerging markets, corporates across many emerging markets entered the crisis with stronger balance sheets compared to developed countries, with relatively strong cash positions. Countries such as Brazil, India, China, and South Korea have benefited from institutional reforms in the last few years, they started the crisis with stronger foundations and greater fiscal flexibility relative to their Western peers, these factors will be key for the recovery.

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Secondly, in the emerging markets, there has been a transformation in the last decade away from cyclical sectors and dependence on foreign demand, towards domestic consumption and advancement in technology. The contribution of trade in the Chinese economy is half what it used to be at peak periods, ensuring that China is no longer heavily dependent on a recovery driven by the developed Western World.

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Thirdly, innovation has been the key notion of emerging market growth relative to the developed markets in terms of infrastructure and business models. Innovation has unfolded in areas such as mobile telecoms, broadband, e-commerce, e-payments, and e-learning. Such business models are highly suited to the structures of emerging markets and benefit from the availability of superior data coverage at a substantially lower cost in countries including China and India.

 

Many emerging market companies that originally targeted domestic needs are finding acceptance and renewed traction in the developed world. We expect a recovery in Emerging Markets as we head into 2021 and the effects of the pandemic are behind us.

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