Accelerating to a future state of investing
To say that a lot has happened in 2020 would be a monumental understatement. The lists of “first” and “biggest” and “most dramatic” developments have grown longer and longer.
We had the longest bull market ever, followed by the quickest bear market. The U.S. 10-year bond yield fell below 1.0% for the first time, while front-end oil contracts fell to negative prices. Policy responses have been sizable and swift, with the Federal Reserve purchasing risk assets. Growth companies, such as the big technology names, have increased their weight in the S&P 500 even after a decade of outperformance.
With all this change, much remains unknown. We do not know the ultimate depth and breadth of this crisis. When it is resolved, what scars will remain, and what new conditions will emerge? Powerful cross-currents – demand destruction and policy support – obscure the path forward for investors, but surely this presents opportunities alongside the risks.
Tectonic plates are shifting
We know one thing for sure: things will be different after the crisis. In business and technology, we speak of the S-curve, the concept that people and processes adapt glacially until an inflection point or force for change, after which they change rapidly.
Now, in the economy, the forces that shape our futures – the global tensions, the economic policies, the political ideas, the new technologies – are all being sped up. What might have taken twenty years before may now play out in two.
Inequality and populism, having grown since the Great Financial Crisis, are now more acute and more present in the dynamics of “essential” and “non-essential” work. How will society view work, patriotism, and pay in the wake of this health crisis?
If we weren’t already moving towards isolationism and deglobalization, the experience of COVID-19 will certainly push us in that direction. This too will have an impact.
Shifts toward renewable energy would have increased pressure on energy-exporting economies over time. Now, the acceleration of a global supply glut will advance those pressures.
Even as the acute nature of this crisis fades, policymakers will face a prolonged battle with demand destruction. At the same time, U.S. government debt, long a concern, is now at higher levels than during World War II. Some of our fifty states will face irreconcilable budget imbalances. How will policymakers reconcile these challenges?
Perhaps we will see a new reality for debt accumulation. Financiers may be less willing to lend, and governments may be less willing to allow corporate America to continue its rampant use of leverage – especially for the purposes for share buybacks. Like the household deleveraging cycle after 2008, the corporate sector debt bubble would have to be deflated. In response, credit growth would slow. Without meaningful investments in things like technology and infrastructure, the potential economic growth rate would slow, too.
The European project has faced important tests in the past, such as its debt crisis and Brexit. Now, once more, the rift between Northern and Southern Europe has the potential to widen. It is clear that Italy’s debt will become unsustainable as the result of a crisis it didn’t cause. Will Germany tolerate debt mutualization to save the regional union?
Durable themes for the future
We do not have a crystal ball. And for investors, it is essential to remain humble in the face of seismic shifts in the world around us. Past crises and pandemics are unlikely to give clear clues as to the path ahead. Instead, we are thoughtfully watchful of the changes that will come, and open to the opportunities that they provide us.
We believe that innovation and creativity will be most important to embrace. The sectors and styles that have done well at the beginning of new economic cycles in the past may not provide the same value in the future. Companies will need to evolve. Powerful thematic trends such as e-commerce, digitization, automation, and reliance on data, are likely to thrive.
We will continue to explore these investable ideas and share with you in the months to come.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
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