An Uneven Path Back To “Normal” | Barita Insights | May 25, 2021

In a full year after the global economy suffered one of the worst health crisis on record, which quickly evolved into one of the worst economic crisis recorded in the post-World War II era, it appears ‘Normal’ has returned. On May 23rd, 2021, individuals were able to attend the Madison Square Garden in New York to watch the local basketball team, the New York Knicks, play in their first playoff game since 2013. This was possible as the Centers for Disease Control and Prevention (CDC) gave guidance that fully vaccinated persons can now go without masks both indoor and outdoors. Local states have implemented their own variation of this guidance, but it’s safe to say some normalcy has returned. Global hotel bookings have increased, cruise line bookings have increased, business and leisure air travels have seen a steady increase, global equity markets are in the green (with its usual ebbs and flows of volatility). However, elsewhere particularly in developing and emerging economies, the devasting reality of COVID-19 is still prevalent. This state of affairs suggests that not only is the path ‘back to normal’ uneven, but it is also fundamentally unequal, which itself might have reverberating consequences for the global economic recovery. Let’s get a handle of where we are in this recovery.

Economy

The International Monetary Fund (IMF) revised their global outlook in April upward to 6.0% for 2021 and 4.4% in 2022, supported by vaccination programs globally (albeit skewed to developed nations versus developing nations), additional fiscal stimulus and continued adaptation of economic activity to subdued mobility. Risks to this include additional lockdown measures caused by renewed COVID-19 breakouts (like the current situation in India), new variants of the virus, delayed reopening measures caused by weaker labour forces and trade disruptions as examples. Our assessment is that the recovery is underway and will continue once there is strict adherence to recommended guidelines to combat the spread of the virus such as social distancing measures. While the CDC issued its updated guidance regarding vaccinated personnel, there has not been a medically agreed upon level for herd immunity. As such, it serves the global economy best that procedures that aided us getting this far into recovery be adhered to.

Securities Market

Global policymakers implemented extraordinary measures to curtail one of the gravest economic conditions in the post-World War II era. This was done through accommodative fiscal and monetary policies that essentially pumped needed liquidity in the capital markets and directly into the hands of households. This level of liquidity and support created the necessary catalyst for the securities market to climb out of the trough of March 23rd, 2020. The MSCI Global Index ended 2020 with a 14.06% return, with a year-over-year return as at May 23rd of 42.01%, and the current year-to-date return of 9.41%. What this implies is that, despite the level of fear induced into the market, policymakers were more than able provide the necessary environment for investors. However, this has led to valuations at all time highs for equities, while the pandemic is still ongoing. Also, inflation concerns continue to be built into the market with yields rising above their lows, spreading concerns for fixed income investors. All around, this creates a challenge for the current investment environment; however, as forward indicators of the economy, there are more positive risks to the upside, barring setbacks related to the virus.

Conclusion

Risks such as the re-emergence of COVID-19 or variants of it being spread across countries cannot be ignored. Plus, developing countries still are disadvantaged by their low access to the vaccine, and that makes them susceptible to delayed re-openings. This indirectly impacts the global recovery as these economies have a part to play in the global ecosystem, such as exporters of pure metals, agricultural products, or crude oil reserves. This truly means that there is still time for the investors to take positions in opportunities in the market. Using our local market, for example, we have seen steady improvements in our financial sector, with companies recording high revenues, lower expected credit losses, and higher return on equity to investors. Our Manufacturing and Distribution sector, which outperformed during the crisis, continued this performance, delivering on top of their strong 2020 performances. Although some risk assets appear to be trading at stretched valuations, there are still opportunities for investors to exploit at this stage of the cycle.