Chief economists are all waiting for the gradual lifting of lockdown measures. But otherwise, there’s little that unites them. Some are optimistic for the recovery to continue, while other believe markets are ahead of themselves.
The corona crisis is severely compromising the growth prospects of the world economy. ‘The stagnation of new infections in the main industrialised countries is good news, although concerns about certain emerging countries such as Russia, India and Brazil remain,’ says Keith Wade (pictured), chief economist at Schroders.
‘The initiatives being taken to avoid a second wave of infections are likely to delay the economic recovery,’ says Wade. Meanwhile, the unemployment rate will rise sharply in many countries. As a result, all the new jobs created in the last ten years will be destroyed, he believes.
Simon Ward, economic advisor to Janus Henderson, is more optimistic due to the magnitude of stimulus measures. ‘Thanks to the various support packages announced by governments and central banks, the money supply is currently increasing. This indicates a rapid resurgence of activity once the quarantine measures are lifted,’ he says. ‘Moreover, it does not seem likely that austerity measures will be reintroduced in the near future.’
Debt burden
Economists also disagree about the consequences of the spiralling debt of major industrialised countries. Wade thinks the increased debt ratios may prolong the period of financial repression. ‘Regulators will try to push public debt towards private and institution, investors as much as possible, in a climate in which inflation should be kept under control,’ he says.
Even if the recovery is delayed by a few months, Simon Ward of Janus Henderson still thinks growth will accelerate strongly in 2021. ‘Governments will face increasing pressure to reduce lockdown measures in the coming weeks. After all, from an economic point of view, these are increasingly difficult to justify,’ he notes.
Inflation and gold
Low oil prices will take a significant toll on the US economic outlook. After all, a lot of investments have been made in the production of shale oil in recent years. Keith Wade believes oil prices will remain low. ‘This is due to the continuing imbalance between supply and demand. This situation is a boost for net oil importers like Asian countries and Europe.’
Although the corona crisis will have a negative impact on inflation in the short term, in the medium term money supply growth could be a breeding ground for a return to inflation. Simon Ward of Janus Henderson finds gold attractive in such an environment. ‘Gold should do well during a recovery phase, and is a hedge against inflation in the medium term.’
Investment strategy
In general, economists believe the most risky asset classes will remain volatile. ‘Markets are currently hoping the lifting of lockdown measures will trigger a massive recovery in the second half of the year. They are ignoring the lasting impact of the economic slowdown in the first half of this year,’ says Shamik Dhar, chief economist at BNY Mellon Investment Management.
It is still too early to start investing in high yield bonds or equities again as they are not anymore valued attractively after the recent rally, believes Johanna Kyrklund, global CIO at Schroders. However, she believes pressure on emerging market assets will be reduced due to the fall in US interest rates, as the dollar should be able to stabilise. ‘Investment grade corporate bonds are currently considered one of few interesting segments in the market. This is mainly due to the unconditional support of central banks,’ says Kyrklund.
Gradual entry
Shamik Dhar of BNY Mellon IM thinks government bonds still deserve a place in a multi-asset strategy. After all, they absorb the shocks that regularly occur in the markets. He also believes that active management will bear fruit, both for equities and bonds. ‘It is important to gradually move into the most risky assets,’ he says.
In the medium term, however, ‘investors should focus on cyclical stocks and emerging markets, which will benefit most if the recovery continues,’ Janus Henderson’s Ward concludes.