In this final piece in The Great Shutdown series, we summarise the lessons uncovered from the research of the past few weeks. We also offer our broad asset allocation observations to equip you as we move into the Next Regime.
Jun 22, 2020
The fast view
Our Great Shutdown series investigated the medium-term implications of the COVID-19 pandemic for markets. Upon reflection, these can be grouped in three conceptual categories: forks in the road, accelerators, and equalisers.
Governments are clearly at forks in the road when it comes to stabilising debt, or reforming the international monetary and financial system. The future of work, meanwhile, will involve an acceleration of digitalisation and the trend towards the globalisation of services evident pre-crisis. The existing trend towards a more regional form of globalisation (rather than ‘de-globalisation’ per se) is also likely to be reinforced. Finally, COVID-19 is an equaliser, not just for the relations of citizens to each other, but also the relations of governments to the private sector.
Three common themes that consistently emerged from our collective body of work were the prospects for inflation, the imperative for digitalisation, as well as the tendency towards higher taxes and regulation, each of which we discuss in these concluding thoughts.
Here, we also put forward broad observations on asset allocation on the basis of our thematic views. In equities, our base case is that the crisis reaffirms key trends seen over the past four decades. Digitalisation will continue, while strong firms will get stronger. The renewed focus on human capital as well as the social license to operate is a tailwind for quality firms with strong ESG credentials. A lower cost of capital benefits firms with high residual valuations, supporting growth stocks.
The range of outcomes remains wider than usual, but the contours of the next regime are already coming into view. The Great Shutdown has increased the possibility of a regime shift driven by governments actively targeting growth and not just inflation. The need to keep debt servicing costs sustainable, and ensure shared prosperity amidst digitalisation and automation, while operating in an unstable yet competitive international monetary system, means that growth will be even more desirable and scarce than after 2008-09.
The jury is out on whether governments can target and achieve growth, but it is likely they will try, starting with negative rates and other forms of financial repression. If they succeed in getting inflation up, that would form the basis of a regime shift that would profoundly affect all asset allocation decisions.
This communication is provided for general information only should not be construed as advice.
All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
All rights reserved. Issued by Ninety One, issued April 2020.