Are your spirits lifted by the lifting of lockdown measures? As we return to work slowly but surely, experts disagree over the strength and duration of the second wave of infections ahead of us. Some fear a fierce and long-lasting second wave by fall, worse than the original one, as was the case during the Spanish flu pandemics in 1918. The most optimistic epidemiologists foresee recurring mini-waves of much smaller outbreaks every few months. What’s already clear is that no economy will escape unscathed. We’ve witnessed a record drop in global growth rates over the past months and expect an uneven global recovery during the coming months.
Our reflection as investors is focused on lockdowns and whether a second wave of lockdowns is a possibility. Here we have a high degree of certainty that this won’t be the case. National governments simply cannot afford the cost of further lockdowns. The experiences of two countries in particular are of special interest in seeing how life “as normal” with Covid-19 can look, Japan and Sweden. Over the past three months, Sweden has taken a laissez-faire approach to tackling the pandemic, leaving a large part of society open, while appealing to its population’s common sense – stay at home if possible and if you feel the slightest flu symptoms, self-isolate. Japan also never initiated a full lockdown of its economy and the approach has worked so far. Its relatively low number of fatalities is especially impressive given the country’s demographic composition. Only time will tell whether these approaches were the correct ones but it may be an example of how we can keep all of our economies open and running as we face the danger of a second wave.
Bolstered by unimaginable amounts of money from central banks and governments, financial markets have witnessed the fastest bull market bounce back from the March lows. While we share hopes that this crisis will be short-lived – with some observers expecting economic activity to reach pre-crisis levels before the end of 2021 – we are increasingly concerned about US-China trade tensions.
China earlier this year pledged to increase US imports by at least 200 billion US dollars by the end of 2021 but is keen to renegotiate the existing phase 1 trade deal with the US as it sees the terms as difficult to meet. Meanwhile, the Trump administration announced new rules barring Chinese telecoms equipment giant Huawei and its suppliers from using American technology and software. The US Senate has proposed a bill to block Chinese companies from listing on US exchanges. Donald Trump has suggested that the ongoing Covid-19 outbreak is manmade, coming from a scientific lab rather than an animal market in the city of Wuhan. All these developments continue to weigh on sentiment. Rising social unrest in Hong Kong and China’s new stern approach to protests there could destabilize the fragile US-Chinese relations further.
We nevertheless stick to our positive outlook for the global economy, despite the numerous uncertainties linked to the pandemic lying ahead. The massive monetary and fiscal packages provide us with a bridge across what is likely to be a severe but short recession. We already see first green shoots of an economic recovery in China, where industrial production has begun to recover. Similar patterns could emerge across the globe as other economies start to open up. The recovery won’t be even, however. Our behavior as consumers and the way we go about our business has changed permanently. So while our spirits may have been lifted, the economy remains a patient.