Uneven global pandemic recovery leaves regional opportunities for investors, says 7IM
The world will remain distorted by the economic and social impacts of the coronavirus until an effective vaccine is widely available, says Terence Moll, Head of Investment Strategy at 7IM.
Most major economies shut down at some stage between March and April, to slow the spread of the virus and give their health systems the chance to cope. The global economy will weather the storm and eventually emerge in reasonable shape.
But regional disparities in the pandemic response and ensuing recovery provide investors with opportunities, according to Moll.
“The virus is a complicated problem that requires ongoing policy changes and planning, rather than a single, one-off solution,” says Moll. “New Zealand got it right; Brazil is floundering. Often, countries struggled at first but are now managing the virus far better.
“The recovery will be uneven in most countries. Many households will be cautious about spending, government support schemes for their populations will begin to run out soon, and virus-sensitive activities like aeroplane travel, restaurants and concerts may not recover fully for years.
“The good news is that those economies that brought the virus under control early have been opening up the fastest – like China, the Czech Republic and New Zealand. The International Monetary Fund (IMF) thinks that China will grow by one per cent this year. If that materialises, it will be its weakest growth number in forty years but one of the strongest in the world.
“Second waves of the virus are less worrisome in Europe and East Asia. Health systems are more prepared to handle Covid-19 patients, and treatments being developed give them more ammunition. Moreover, governments are monitoring the spread of the virus and should be warned if it surges. They’re unlikely to lockdown economies again, but will tighten the social distancing and other rules if necessary.”
The IMF expects the developed economies to contract by a massive eight per cent this year, by far the worst number on record. The world economy is likely to contract by five per cent.
Next year should be much better, but there’s a great deal of pain to overcome first, says Moll. Governments, in turn, have had to adjust to the reality of Covid-19.
“Curiously, markets have been strong since the third week of March. The FTSE 100 rallied by nine per cent in the second quarter, and other developed markets were up by more than that. Why? Probably because investors expect that the economic recovery will be V-shaped. What falls hard must bounce hard, right?
“But the USA is in trouble and may not participate in a recovery that emerges elsewhere. The worst-afflicted areas in the north-east, like New York and New Jersey, are under control. But the disease is spreading in the south and west, led by Florida and Texas.
“If it becomes endemic in the USA and some developing countries, then the post-1945 story of globalisation, travel and relatively free movement between countries could come under threat.
Finally, Moll explains how 7IM is positioning with such regional differences in mind.
“The 7IM portfolios are positioned for an erratic and uneven global recovery. With yields ultra-low, we are gloomy about government bonds, and prefer a select group of alternative strategies that are mildly defensive and should earn decent returns over a year or two.
“Our exposure to equities is broadly positive. In the US we have a fairly defensive thematic exposure, preferring healthcare companies and quality industrials to the broader index. In Europe we like dividends, which we believe sold off too much earlier this year. Moving east, we like Asian high yield for its exposure to economic growth.”