By Andrew McCaffery, Global Chief Investment Officer, Fidelity International
We believe the Covid-19 crisis will trigger a step-change in policy, accelerate existing trends and transform investment frameworks. Government intervention, fiscal activism, corporate governance and sustainability, and continued Asian economic strength will characterise this new order, creating opportunities out of dislocation.
History is littered with examples of large-scale crises ushering in new governmental, economic and social structures. In very recent history, the Global Financial Crisis led to an era of low interest rates and growth, and repeated central bank intervention. Now we think the Covid-19 crisis has the potential to spur its own set of changes.
How the crisis unfolds largely depends on the trajectory of the virus and how policymakers respond.
As a result, we see three broad economic scenarios developing. The base case, to which we ascribe a 60 per cent probability, is a U-shaped recovery. This entails social distancing for the rest of the year.
Policymakers will provide further support, both on the monetary and fiscal side, but given the scale of the challenges, including falling inflation, high unemployment and a deep recession, this could lead to lasting changes in the economy creating a new economic order.
1. The new economic order
The new economic order will be a world of increased government intervention displacing the free-market policies pursued since the 1980s. Fiscal activism will bear more of the burden and work in conjunction with monetary policy. One area of continuity will be Asia’s enduring role in driving global growth.
Investors will have to reconcile themselves with an environment of continued low and negative interest rates, debt overhang, unconventional monetary policy tools such as yield curve control, and fiscal spending on a scale we have never seen before. But these challenges create market dislocations that investors can exploit.
2. Opportunities from dislocation
We see dislocations creating opportunities from new forms of globalisation, including building resilience around supply chains (especially where their importance veers into national security), regional disparities in a return to ‘normal’ after the virus, and differences in demographic profiles.
The virus is accelerating the move to online consumption and the best companies are adjusting. Valuation disparities have unlocked rare opportunities to buy quality companies.
In fixed income, continued low rates and central bank corporate bond purchase programmes are a boon to risk assets. With ratings in flux, we see attractive opportunities among some fallen angels, as well as pitfalls to avoid as the credit cycle plays out.
3. The acceleration of sustainable investing
Finally, if the trend towards sustainability was already in motion, then the Covid-19 crisis has sped it up.
Corporate governance and sustainability will become widely adopted concepts after proving their worth during the crisis. Our research shows that, as a group, companies awarded higher ESG ratings outperformed the index during the depth of the crisis, while lower rated companies underperformed.
This quality will take on new appreciation by the market. There could also be increased collaboration between private and public entities, especially where sustainability issues overlap with national security.
For investors, our previous macro assumptions must undergo a major update. As we work through these challenges, we believe that greater government intervention, fiscal activism, corporate governance and sustainability, along with continued Asian economic strength will become permanent features of the investment landscape in the new economic order. Finding flexible ways to navigate these changes will be crucial to generating robust, risk-adjusted returns over the longer term.
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi-annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0820/32036/SSO/NA