25 May 2021
May 2021 | Robert Plant, Director, Portfolio Manager, Multi Asset Solutions
The Covid-19 pandemic had been unprecedented in its impact on the health of populations around the world. The resulting social impact has also been unparalleled, whether this has been the extent of restrictions placed upon people’s daily lives, or the lack of action and the subsequent social crises this has caused. In order to counter the financial cost of restrictions, many governments have reacted in accord, by putting in place huge levels of financial support. But this has not all come in equal form, and will likely not result in equal success.
Governments have faced the same economic problem around the world; the pandemic has necessitated lockdowns which have had huge financial implications in terms of loss of incomes for individuals and businesses, and therefore contraction in economies. And many governments have taken the same remedial action in the guise of fiscal stimulus. But this financial support has not been implemented in the same way.
For example, the US has chosen to let the unemployment rate rocket but counter this with huge benefit packages for the millions that have lost their jobs as a result of the pandemic. On the other hand, Europe has sought to keep unemployment in check via the furlough system, where jobs are kept by subsidising companies to retain even if they are unable to work.
Short-term winners
In the immediate term, both types of fiscal stimulus produce winners, as they safeguard income, whether this be in the form of benefit payments or an underwriting of salaries. But the sums of money pledged differ greatly. Many US citizens have received far more in benefit payments than they would have earned had they kept their jobs. In Europe, the salary subsidies either fully or partially match pre-pandemic earnings.
Medium-term winners
In the medium term, as nations, to varying degrees, begin to ease restrictions and open their economies back up, it is the US that is likely to see the biggest rebound in its economy. This is because the over-payment via benefits means that there is much more ‘pent-up demand’ waiting to be released back into the economy via retail spending. In Europe, many workers who have only had their income partially covered will have less to spend, and be more wary of spending.
Long-term winners
Over the longer term, it is more difficult to predict who the winners will be. Will the US economic rebound encourage businesses to re-hire the millions they had to let go during the pandemic? In Europe, will the winding down of the furlough systems find businesses in a fit enough state to retain their staff, or has the unemployment can just been kicked down the road?
Fiscal stimulus policies are not designed simply to protect existing jobs. They also aim to create new jobs, as well as kick-start the economy and support productivity over the longer-term. The trillion-dollar fiscal packages enacted in the US during the pandemic have indeed been put in place as immediate relief for individuals who have lost existing jobs. However, these are not the only planned fiscal measures. President Biden has also pledged infrastructure and social spending for more longer-term investment for the population and the economy. These fiscal programmes amount to some $4 trillion and are mirrored by similar post-pandemic fiscal plans elsewhere, such as NextGenerationEU. This €750 billion package has been designed by the European Commission not just to create jobs and opportunities, but also to transform the economy over the longer-term with an emphasis on the green agenda.
While the method may vary between countries, in general, the billions and trillions tell us that governments have been prepared to ‘do whatever it takes’ to prop up economies until restrictions are lifted and ‘normal’ cycles can resume. It also tells us that governments are looking further ahead, to a world post-pandemic that needs investment to help economies transform and grow. This will open up many opportunities for businesses, including for those that are at the forefront of innovating for improvements in ESG-related global challenges.
In terms of multi-asset portfolios, while we do take high level regional views to help us understand the macroeconomic backdrop, we believe that broad regional allocations alone are not prudent. Within regions and asset classes, fundamental company research should be undertaken to make the best investment decisions and identify the winners that will benefit from the huge fiscal injections into the global economy.
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Views and opinions expressed by individual authors do not necessarily represent those of BMO Global Asset Management.
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