A Most Unusual Recovery

According to Guy Monson, chief investment officer of Sarasin & Partners, a boutique investment fund manager the recovery in the global economy has been very unusual since April. Firstly there has been an unprecedented increase in public debt around the world with massive government support. Debt in developed and developing economies may reach 120% of GDP by the year end or into 2021, levels not seen even during wartime. However despite the challenges public debt provides opportunities for investors from government spending on infrastructure, the green agenda and business support.

The US economy has rallied but in a different way to previous recoveries. Retail sales have rebounded sharply, remarkably to levels that are higher than before Covid. The V shaped graph Monson showed was the deepest from peak to trough to peak and narrowest from peak to peak I can ever recall seeing and all in double quick time. The housing market has also been strong on the back of ultra-low interest rates. On the downside unemployment in the US (and elsewhere) is very high and Sarasin expect permanent scarring to the labour market through business failures and capital now not being deployed.

Remarkably the dollar which normally rises in a global economic crisis has fallen against other currencies, notably the Euro. Normally in recessions dollar strength sucks in money from emerging markets, to their detriment. It hasn’t happened this time around which is supportive for developing economies.

Another unusual feature has been the sharp rally in the price of commodities, notably copper which is up since the beginning of the year. Normally in sharp downturns and recessions highly economically sensitive commodities like copper fall sharply. The rally is linked to dollar weakness and I suspect from massive promised infrastructure spending. 

Finally the Euro and European assets (equities) have been red hot in the last 8-10 weeks following the Franco-German EU recovery fund proposals which were announced on 15/5/20. Since then the MSCI Europe Index has risen 27% about 10% more than the technology heavy Nasdaq index in the US. It appears to be another “we’ll do whatever it takes,” moment to support the EU economy. Again this bounce is extraordinary given Europe is normally fragile during downturns.

Going forward the range of outcomes for the global economy is incredibly wide according to the IMF. It depends on the extent of the second wave of the virus and success in finding an effective vaccine. According to Monson the IMF’s analysis the difference between the best and worst outcomes is the greatest he has seen in his career. This means a huge great cloud of uncertainty hangs over the global economy.

For investors Monson concluded by doubling down on Sarasin’s thematic investment strategy. This is where fund managers seek to identify global trends in the economy and business and invest in companies that could be big beneficiaries. There are all sorts of sectors here robotics, digitalisation, renewable energy and healthcare for an ageing population. These are all pre-Covid trends, nothing new. Then there are winners that have emerged during the crisis, contactless payments, remote conferencing, manufacturers of PPE and infrastructure. Housing and home improvements should also be beneficiaries from ultra-low interest rates. In the UK the temporary stamp duty holiday will be a tail wind.

In conclusion the global economy has demonstrated its capacity to surprise and throw up unique problems and opportunities for investors. Who predicted all this at the start of the year? The ongoing uncertainty makes it difficult to predict where is good to invest money. A diversified portfolio is invariably the best hedge against uncertainty.

The content of this blog are my own views based on the Sarasin presentation.  It is intended as general investment information only.  Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.