Client Update - 16th April 2021
Not a lot has changed in the last two weeks, although I would note that the vaccination roll-out and the subsequent decline in the intensity of the pandemic is clearly uneven across countries. The shocking numbers from Brazil and India contrast vividly with the progress made in countries like the US and the UK. This should provide some caution about the global outlook. If big emerging economies continue to struggle, that will be a drag on global growth. Moreover, the high level of infection rates in those countries will delay a full return to normalised international travel, which is clearly a negative for sectors such as airlines and hotels. Most interestingly, there has also been encouraging news from Europe with a number of countries reporting an acceleration in the vaccine roll-out.
Short term markets continue to look attractive. April is traditionally a very strong month for global equities. For a number of key equity indices, over the last 15-years, April has been the best performing month of the year. Central banks have stabilised expectations about changes to monetary policy and its hard, in the short term at least. At the moment, markets are generally back to being driven by the very powerful combination of good economic data and super-easy monetary policy.
For the coming weeks it will be all about the data. The US will be at the forefront given the combination of vaccinations and stimulus. In the minutes of the last Federal Reserve (FED) open markets committee, the US central bank again stated that policy will be left on hold until its inflation and employment targets have been met. Assuming the unemployment level reached before the COVID-19 crisis (3.5%) represented a full employment situation. In March, the unemployment rate was 6.0%. In the last cycle it took five and a half years to get the unemployment rate down from 6% to 3.5%. It will clearly be quicker this time given the rapid re-opening of many parts of the economy. At the pace of decline in the unemployment rate registered so far in 2021, the economy will be close to full employment by the middle of next summer – ahead of the date that the Fed itself has pencilled in for raising interest rates. However, sustaining the “recovery” pace of declines in the unemployment rate might be difficult, depending in the extent that permanent damage has been done to some sectors and jobs in them.
It will also be interesting to see how labour markets develop in coming years. The pandemic has accelerated the move towards flexible working in many parts of the services sector. Working from home will be a more permanent phenomena for many of us, even if it is mixed with spending time in the office. There will be changes to the relationship between employers and employees and the kinds of benefits that will be offered and demanded as a result. Retaining employees and getting the most out of them will be more nuanced in the future than simply offering pay rises. The cost may not be simply higher wages in order to hire and attract. As a result, the relationship between employment, wages and inflation could continue to be very difficult to understand and model. More flexibility in the labour force usually means less upward pressure on wages.
The pandemic, with the related lockdowns, is bound to have a lasting impact on the relationship people have with work, both at the individual and aggregate level. It sounds “corny” but the last year has shown that there is more to life than “earning a crust”. People have missed out on social interaction, on being with friends and family and on experiences outside of the home. They will value them more as a result and the trade-off between enjoying those things and a salaried income is likely to have changed. Companies will need to respond to that and from a responsible investing point of view, more care will be needed to be taken in understanding how companies manage their human capital, how they act to address diversity and inclusion and how they ensure that people want to work for them in a productive way. The “S” in ESG (Environmental, Social and Governance) investing will become more important and employers will have to think about doing more.
I get the sense that markets and society in general is taking a bit of a breather, at least in parts of the world that can. There are few big political focus points like there have been in recent years (Brexit deadlines, US elections) and the lifting of social restrictions will mean holidays (at home!) and time spent away from the screen. A period of calm is already reflected in the VIX fear index getting back to its pre-crisis lows. The next few weeks will be a period of confirmation that the recovery is happening. If so, then the shape of the world going forward will be the focus of investors. Sure, the impact of pent-up consumer spending and business investment should continue beyond the end of this year, as will more generous fiscal policies. However, at some point the marginal impact of these will ease and new factors will become important for investors. In the last year a lot of mental effort was spent on thinking what a post-COVID world would look like. Soon it will be time to start experiencing that – smart working, greater care of social factors in business and public life and an acceleration of de-carbonisation. If we are lucky and smart, a sustained and greener economic expansion might be ahead of us.