The Inside Track November 2020

  • China has ‘controlled’ Covid-19 and is beginning to reap the economic benefits. In the rich world, up to now, policy has staved off economic disaster but the spectre of mass unemployment looms. A US, divided as never before, braces itself for post-election turmoil – the world watches and worries.
  • Policy alone stands between the global economy and the abyss. The combination of exceptional monetary and fiscal support(so far USD11.7tr for the latter – almost 12% of global GDP) has averted an immediate catastrophe. What comes next? More fiscal activism. COVID-19 has succeeded in upending economic orthodoxy: supported by the IMF, the richer countries have abandoned and buried austerity and are attempting to spend their way out of the pandemic. This comes at the expense of sharply deteriorating debt to GDP ratios and huge question marks about the future of growth and debt crises.
  • However, monetary and fiscal support can only go so far. It will help some sectors and companies in some countries, but won’t prevent massive bankruptcies in those industries structurally hit by the pandemic. Also, it won’t work in developing countries that don’t have the latitude to implement expansionary policies (for risk of hammering their currencies). This is why the global recovery, when it happens, will be protracted, uneven, and uncertain.
  • A country’s economic recovery is highly correlated with its success in containing the pandemic – simply put: the more the virus circulates, the weaker the economy. Therefore, it comes as no surprise that China will be the only G20 country to register positive growth this year. (In Q3, it grew at 4.9% Y-o-Y, fuelled by a 6.9% rise in industrial production). This expansion gives Beijing accrued confidence and greater geopolitical leverage. So does the flurry of successful listings in Hong Kong and Shanghai. In the equity market as well, the centre of gravity is shifting away from the US.
  • In light of the above, not unsurprisingly the exponential resurgence of cases in Europe (46% of the world’s total COVID-19 infections) and the US will inflict further economic pain and lasting damage. This makes a contraction in Q4 a quasi-given. Beware of misleading announcements, like the media trumpeting the best quarterly US GDP growth on record (an “annualised” +33% in Q3). It is not what it seems and confuses a rebound with a recovery. On a quarterly basis, US GDP rose by 7.4% in Q3, having fallen by respectively 9% and 1.3% in Q2 and Q1. The US economyis therefore 5% smaller today than it was at the beginning of the year.
  • Unemployment– from an economic, political, and social standpoint – constitutes the greatest threat to the economic recovery. Levels are dire; even the official figures belie the stark truth – they are much higher. Meaningful comparisons are difficult because official calculations vary from country to country. But in the US for example, when hidden unemployment (which includes those looking for, but failing to find, a full-time job paying a living wage) is factored in, the unemployment rate explodes to 26%. This situation disproportionately affects young people, placing, worldwide, an entire generation at risk.
  • COVID TRENDS – to add to those raised in past issues (less meat, less USD, less oil, more activism, more US/China rivalry, more EU integration, less business travel, more WFH), here are three more: (1) less physical infrastructure in banking and retail(COVID has dramatically accelerated e-banking and e-commerce; Ant – one of China’s biggest banks, has 0 branches); 2) more dogs – the “pandemic puppies”’ effect (pet food is the greatest contributor to Nestlé’s growth: +10.6% Y-o-Y) and (3) more robots (up by about 40% this year, principally in logistics, medicine and cleaning).
  • The market value of the FAANMG stocks currently exceeds that of the 7 largest European countries’ indices combined – a reminder that a few digital giants capture a staggering percentage of corporate wealth. Future value creation lies undoubtedly in data, IPs and brands, but legislators and regulators, both in the US and Europe, are now intent on curbing the ‘monopoly power’ of big tech and to submit the industry to stringent new rules. Will they succeed? It’s hard to tell, but with growing awareness of the harm it inflicts on large swathes of the economy, our societies and our own individual wellbeing, the tide of public opinion is beginning to turn against big tech.
  • At the recent Armenian Summit of Minds, President Sarkissian warned that the conflict in Nagorno-Karabakh could be the harbinger of a broader conflict with unforeseeable consequences (“the equivalent of Syria to the power of n”). If Azeri forces get hold of the Lachin pass that connects Nagorno-Karabakh to Armenia, the war might be heading to the point of no return, with a risk that both Russia and Turkey are drawn into it. This small corner of the Caucasus crystallises what the post-COVID geopolitical world, characterised by a vanishing US global role, will look like.
  • The commitment to net 0 has grown to such an extent (+300% among companies since the beginning of the year) that it’s now creating its own momentum. Investing in anything greenand in carbon capture / removal in particular (forestry and soils, direct carbon capture) has reached escape velocity, freed from the gravitational pull of the sceptics and naysayers. Alongside tech and healthcare, green is bound to be a favoured investment theme for years to come, but beware of ‘greenwashing’, particularly in the green bond market!
  • This note was finished two days before the US election, but after extensive conversations with our network, we can confidently predict that the results will be fiercely contested and that a protracted period of political instability and social turmoil, including violence, will ensue. This could last into January 2021 and cause considerable damage to the image of the of the US abroad. Portfolio investors: brace for impact!
  • Download the full report: The Inside Track November 2020