The public mood darkened once again in late 2020 as governments responded to a second wave of Covid-19 contagion. Nonetheless, it is important to keep a sense of perspective: the humanitarian impact of the virus is big, but the lasting economic effects at least may prove less profound than feared.
For long-term investors in general, and despite the confident assertions of so many pundits, the virus may not “change everything”. Economic growth will remain the norm, and assets exposed to it are likely still the best way of preserving and growing the real value of long-term endowments for trustees willing and able to take the risk.
Portfolios should continue to hold some insurance, but a more drastic restructuring of portfolios may not be necessary. Charity trustees in particular are currently finding investment income even more elusive than it already was, but the assets that are most likely to deliver long-term income will remain the same.
The daunting economic slump that began in March 2020 was remarkable in many ways:
- It was the most sudden.
- It was the deepest since the Great Depression.
- It was the first services-led downturn.
- It was the least contentious: the economic consequences of lockdowns were clear to everyone.
- It led to an unprecedently big and speedy policy response from finance ministries and central banks. It turned the IMF Keynesian.
- It saw the fastest bear market – followed immediately by the fastest bull market – in stocks.
- But also, and perhaps most importantly, it was the first deliberate downturn.
Uniquely, this economic slump was engineered to suppress the spread of illness. To keep us safe, governments effectively closed part of the world economy. We can’t spread the virus if we’re not allowed to travel and mingle – but we also can’t do as much business.
Those fiscal and monetary policy responses needed to be seen in this context. Big and fast as they were, finance ministries and central banks were criticised for not doing more. This missed the point. If the virus could only be tackled by limiting human contact, this meant – inevitably – a smaller economy. It wouldn’t have made sense to close the economy with one hand and to try to keep it open with the other.
The priority had to be to try to help the most affected families and businesses, and to limit any long-term fallout. Of course, no safety net could hope to catch all the needy. Charity trustees don’t need to be told this: the demands on charities’ funds have been ratcheted higher even as their investment income has fallen further. Moreover, with many businesses at a standstill, some lasting damage was inevitable. But I don’t see how – given the need to reduce personal contact – governments could have done a lot more.
Another criticism has been that it was crass to think at all about the economic costs of suppressing the virus – the idea being that human life is priceless, beyond value, and to be preserved at any cost.
That may be true for us as individuals, but society often places a monetary value on life. It does so for the anonymous (or statistical) lives jeopardised in normal times by limited health service budgets and large-scale construction projects, for example. It also does so less anonymously for specific lives covered by the insurance markets, or by compensation for damages in the courts.
The unit of account in this grim arithmetic is the “quality-adjusted life year”. Very early on it looked as if the implicit value being placed on lives saved by suppressing the virus would be unusually high.
This can of course be read in two ways – as the considered response of a caring (if inconsistent) society, or as the unconsidered outcome of hastily-taken emergency decisions.
More generally, it is sometimes suggested that the costs of suppression are only economic in nature. But economic losses are real, and directly correlated with non-economic costs that go unquantified – such as other healthcare problems left untreated, or aggravated.
It is also a mistake to think that being in favour of lockdowns is somehow progressive. The people who are most vulnerable to economic upheaval are almost always lower-paid workers. In this instance the poorest families were particularly harshly treated by the closing of schools. This hurt both parents, who were less able to work, and children, who were less able than better-off kids to migrate to home and online learning.
Hindsight is wonderful, of course, and the blame game is not productive. To some extent, the arrival of a new, life-threatening virus meant that something bad was in store whatever we did, and the collective decision we had to take was simply to choose the form which that bad news would take. Would it be suffering caused directly by the virus, or suffering in the shape of the economic and healthcare consequences of suppressing it?
As noted, of the many ways in which the 2020 downturn was unique, the most important (it seemed to me) was its man-made nature. It is best viewed primarily not as an economic event, but as a healthcare event with shocking economic effects.
The global economy was in good shape beforehand. Inflation, the biggest threat to collective prosperity in my lifetime, was minimal, even as unemployment approached half-century lows in the US and UK. There were few signs of the reckless borrowing, crazily elevated house or stock prices, or policy misjudgments, of the sort that have led to other setbacks.
There were tensions of course – most obviously around US-China and UK-EU trade, and the level of global debt. But worries on these counts looked manageable (and had done for some time).
As a result, provided the economic infrastructure remains intact, there has been no reason why, as the healthcare emergency fades, economic activity might not resume. The first wave of the virus faded within a couple of months, allowing lockdowns to be eased, and it seemed as if yet another superlative might be added to the list above: this daunting downturn might prove brief.
The decline in the economy was indeed sudden, sharp – and short. For the big Western economies, it was compressed into the six weeks or so between mid-March and the end of April. When the news looked most grim, the worst was in fact already behind us.
China’s economy, somewhat ironically perhaps, had already regained its starting point by mid-year, but by the end of September the US, eurozone and UK had traced more than half of their lost ground.
The initial V-shaped bounce was always likely to fade, but even allowing for some slowing, a return to pre-crisis levels of output seemed to be on the cards in 2021, a better prospect than most forecasters had feared back in the spring. If output was capable of recovering more quickly than feared, so too of course was the labour market: the risk of mass unemployment has fallen too.
To some extent, the autumn surge in cases reflects more widespread testing than in the spring. Mercifully, fatality rates have risen by much less – perhaps because of better treatment, and/or a different (younger) demographic being infected.
Meanwhile, greater awareness of that grim cost-benefit calculus – the high costs of suppression – has also been staying governments’ hands. More people are questioning the lockdown strategy than in the spring.
The key question for economies is whether the sectors affected by renewed constraints are large enough to arrest the overall rebound. Stock markets have rebounded further and faster than GDP: this must partly reflect the even lower levels of interest rates now in place, but it also likely reflects an implicit assumption that the rebound will indeed continue – or that any interruption will be a modest one.
This is what the stock market often does: it is forward-looking, and when times are tough, it looks across the valley, anticipating recovery. It is usually right to do so: whatever the short-term outlook, you need very good reasons for betting against growth in the longer term.
This traumatic episode, like others, will pass. Even without a vaccine, the virus will eventually be side-lined as we adapt to it. The key drivers of economic growth – natural resources, labour, infrastructure, technology – have not changed or been used up. And some supposed constraints on growth – all that debt, for example – may not be, as even the IMF is coming to realise.
The idea that things will have been transformed at the micro level may also be mistaken. It is wishful thinking to imagine we will permanently become less materialistic and consume less: many people can’t afford not to spend, and not only in the emerging world. Others will not stop wanting to travel, to attend events, to eat out – or even to buy things from those old-fashioned places we call shops. Memories can be short.
Charity trustees still face a choice between growth-related assets such as stocks on the one hand, and safe havens such as government bonds and cash on the other.
Stocks’ rally has used-up much headroom: future gains may be more modest. They are volatile, and their dividends have been cut. But even after falling, those dividends still deliver more investment income than cash or bonds seem likely to and are likely to recover faster than interest rates will rise. And those havens may prove less safe if inflation risk eventually revives along with growth.
Kevin Gardiner is global investment strategist at Rothschild & Co Wealth Management
Charity Finance wishes to thank Rothschild for its support with this article