The coronavirus crisis continues around the world, creating historically uncertain outlooks across industries. Asset owners are in a position to steady the economy and strengthen the recovery through their investments. Sharing ideas and having conversations about the state of the crisis – and firms’ responses to it – is a key way to build a knowledge base for moving forward.
To that end, Bloomberg brought experts together (virtually) for the Global Asset Owners Forum. Register to watch a recording of their discussion here, and read on for the first installment in a two-part series as we share some of their insights on how asset owners should think about their portfolios as they look ahead to post-pandemic times.
Reconciling two stories
With the world in recession since the first quarter of 2020, asset prices have been misaligned to economic realities for most of the year. Following a rapid downturn, the markets spent much of the summer in a V-shaped “levitation mode,” according to Dr. Catherine L. Mann, the Global Chief Economist at Citibank, whereas the economy was, at best, treading water.
The reasons markets were mispricing economic realities are many (and there continue to be major discrepancies even as recent months see drastic market swings and an expanding economy). Still, viewing the financial markets’ earnings as a statement about where 2021 is headed is difficult, given the limitations of the government’s fiscal and monetary policy responses to the pandemic to date.
“In order to ratify what the financial markets are telling us, that there has to be more,” says Dr. Mann. “There has to be something that’s going to catalyze a return to private investment business investment, that will be supportive of employment, because ultimately those are the two underpinnings of consumer strength in the economy. That consumer strength is what’s going to ratify the financial markets’ earnings. And I don’t think we have that yet.”
Responding along with the U-shaped recovery
Not only is the prospect of additional federal assistance to U.S. consumers or businesses unlikely ahead of the November elections, it also may not be enough. The pandemic has had unique characteristics as a driver of recession – compelling a faster market free-fall than the Great Depression, for example – and it arrived at a time when the corporate sector is much more leveraged than it was during the 2008 global financial crisis.
To survive these times and prevent bankruptcy, many businesses will need to “spend less and save more,” according to Dr. Nouriel Roubini, a professor of economics at NYU’s Stern School of Business and the CEO of Roubini Macro Associates LLC. They can do so by reducing labor costs, for example, and limiting new investments.
The uncertainty and risk-aversion of businesses, coupled with decreased consumer spending due to lost jobs, means the recovery will be “U-shaped at best,” says Dr. Roubini.
The risk of a W-shaped (or “double-dip”) recession is still in play as well, as countries face the threat of a second wave of the virus (and the fallout of multiple U.S. states having re-opened their economies). Worse is the possibility of an L-shape, in which over-monetization of the deficit through aggressive long-term policy actions leads to eventual stagflation.
Rebuilding using structured decisions
There’s no playbook for a U-shaped recovery, but investors are in a position to help realize it with what they support.
“To my mind, this is not an environment to be adding leverage [or] to be taking bold, heroic investments,” says Simon Pilcher, CEO of USS Investment Management Ltd. His firm instead views this as a time to “protect investments we’ve already made” while still “looking out for opportunities that we think will be robust going forward.”
Most importantly, USS is supporting the management of and deploying of capital to portfolio companies they believe can thrive – especially those with a fundamentally strong business model, but that may be over-leveraged or have too little cash in the short term. The focus is on providing support “that will be in the interests of the businesses and the employees that we’ve invested behind.”
As for reallocations, USS looks out for upward-downward potential. When its U.S. fixed-income assets began outperforming all other assets, for example, the firm used that as an opportunity to reposition a lot of its holdings back into the U.K., where those equivalent assets had not performed as strongly (perceiving more scope for downward reactions in the U.S. and upward movements in the U.K.).