At the time of writing this article, the ASX 200 index has recovered over +20% from its March lows. Why is this, and what are investors telling us about the post-COVID-19 global economy?
Each severe equity market downturn has one thing in common, they are all different. During the 2008 global financial crisis, some economists predicted similar financial consequences to the Great Depression as the entire United States (US) banking system came into question. Unlike during the early years of the great depression, after the collapse of Lehman Brothers in 2008 the US Federal Reserve started a process called “quantitative easing”. This is a process by which central banks lowered interest rates and provided capital to banks to encourage free-flowing lending to stimulate the economy. Quantitative easing had profound effects on financial markets and played a large role in containing the US unemployment to a peak of 9.9% after the crisis of 2008. Central banks around the world have resumed this process and on a much larger scale throughout the COVID-19 crisis.
Other policies currently being used throughout developed economies include paycheque protection programs such as Australia’s JobSeeker and JobKeeper payment programs and the extension of loans to small and medium-sized businesses. Whilst this is increasing government debt globally, it is a stark contrast to the way governments reacted during the great depression, where the general consensus from leading economists and policy makers was to decrease government spending and reduce public debt. This action ultimately only served to exacerbate the depression and thankfully, based on the stimulus activity in play today, governments have learnt from these past mistakes.
What could we expect?
In April, the International Monetary Fund (IMF) predicted the cumulative loss to global Gross Domestic Product (GDP) during 2020 and 2021 from the pandemic crisis could be $9 trillion US dollars. The IMF also estimates that governments will inject approximately $8 trillion US dollars into financial systems using methods such as the ones described above. It is these large fiscal and monetary stimulus programs, as well as hopes for a vaccine, that have provided investors with the confidence to drive up equity markets. The way in which they are investing may give us some insight into what the economy may look like after the pandemic.
The global economy after the virus is undoubtedly going to be a different one. Resulting changes in consumer behaviour could disrupt a number of industries, including travel, retail, tourism and commercial property. As domestic lockdown laws are relaxed, international travel is likely to recover at a much slower pace as different governments deploy a variety of containment and tracing methods. We may see more travel with countries that are on similar trajectories of infection rates such as New Zealand, and significantly decreased travel to old favourites throughout Europe. Some white-collar workers may find working from home becomes - at least for part of the week - the new normal, which may see an overall decrease in demand for office space and commercial property. Countries that rely on immigration for growth may find it difficult to generate the same amount of domestic growth as previously. For example, in 2017 Australia had almost 800,000 international students enrolled in some form of education. As students are not permitted to travel, let alone sit together in a classroom (at the moment), online learning will have to become an accepted method of education. Regardless of how the world changes post-COVID-19, the one certainty is that disruption for many old-world paradigms will be amplified.
Many of the COVID-19 driven challenges are being met by new technologies and, in some cases, demand has not been destroyed but shifted. Much of this demand is shifting to businesses we have highlighted in our recent investment commentary, those that are leading the third industrial revolution. Zoom, now a popular video-conferencing service provider is a business that has excelled during the COVID-19 pandemic. In 2013, it had 1 million total downloads, but in a single day in March of 2020 it was downloaded more than 343,000 times. Amazon (NASDAQ:AMZN) has gained more than 20% this calendar year as people increase online shopping and Netflix (NASDAQ:NFLX) has “sworn it won’t run out of shows during the pandemic”. While the Dow Jones industrial average – a widely accepted US manufacturing index - is down roughly 17% this calendar year, the tech heavy Nasdaq-100 index has posted modest gains since 1 January 2020. Conversely, energy companies have fallen almost 40% with the capitulation of demand for oil. Using these broad-based indices tell us that investors remain confident that demand for technology will continue and older, higher leveraged companies may struggle to adapt to meet new challenges.
At BDO Private Wealth, we have guided our clients through a rapidly changing world for more than 30 years. The pandemic has once again highlighted the importance of maintaining a diverse investment strategy, but it has also reminded us that we were already in a time of increased disruption due to the new industrial revolution. Investing is for the long term, and although the past can inform us, we must look to the future. If you would like to discuss your portfolio or your wider personal financial situation, please get in touch with a BDO Private Wealth Adviser.