COUNTERPOINT AUGUST 2020

Asynchronous paths

The world economy is recovering – but at different speeds. China is leading the way and activity in Europe is picking up, but the US is suffering a temporary setback

The coronavirus pandemic continues to cast a shadow over the world and is likely to continue doing so until there’s a vaccine to protect us against the disease. Yet the economy is reopening and the recovery is gaining momentum. We’re particularly encouraged by the announcement of the European Union’s EUR 750 billion recovery fund.

At Quintet we’ve been focussing on our sustainable agenda and, as part of Plastic Free July, we have committed to eliminating all plastic consumable products from our 50-city network by the end of the year.  You can read more about reducing single use-plastics here, in our article discussing a plastic-free future with Daniel Webb, founder of the Every Day Plastic project.

Google has recently started to publish aggregated, anonymised data showing how people’s movements have changed throughout the pandemic. We’ve been monitoring the indices for retail & recreation and transit stations as a real-time guide to how the recovery is progressing. The latest report suggests economic activity is picking up in Europe, where infection rates are low, but stalling in the US as targeted lockdowns return.

The way in which each country responded at the start of the coronavirus crisis is influencing its ability to recover. Those that introduced strict lockdown measures are finding they are able to reopen their economies and contain the virus, including China and Europe. In contrast, many of those that didn’t are suffering from a sharp increase in new infections and their recoveries are faltering.

China has returned to growth. It has all but eliminated Covid-19 since February, which has allowed the economy to get back into gear. Although Europe has lagged so far, its economy is also shifting up a gear and should catch up further. We believe the recently announced European recovery fund is a game-changer for the region.

In contrast, the US has hit a speedbump. Some US states have had to reimpose many of the curbs they had only recently lifted to control the spread of the virus. The early lifting of lockdown measures had resulted in businesses reopening and people returning to work. A recent fall in consumer activity is likely to reinforce the case for extra fiscal stimulus and we expect a new package to be announced over the summer.

We’re watching three key dimensions to help us determine the speed of the economic recovery – corporate activity, consumer spending and the spread of Covid-19. Government rescue packages and central bank stimulus measures have already done much to help businesses and workers through the crisis, and their ongoing support is crucial for the recovery to continue.

The strategy behind our model portfolio has not changed over the past month and we believe the current balance of traditional and alternative investments is appropriate for the economic environment. That includes overweight allocations to equities, in particular the technology and healthcare sectors in the US, as well as selective emerging markets.

We also see potential in some sectors of the corporate bond market, specifically euro high yield and emerging market debt denominated in hard currencies. To offset various risks, we include assets that have historically been more stable during periods of market stress, including gold, US Treasuries and the Japanese yen. We have an underweight allocation to European government bonds and UK gilts, which look unattractive at today’s prices.