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The pandemic amplifies existing trends
First published in Finanz und Wirtschaft, Saturday 6 June
Mr Chaar, economic activity is slowly returning in many countries and the corona-related lockdown is being lifted. What kind of world will we live in after the pandemic?
First of all, we need treatment or vaccination against the virus so that we can even talk about a post-corona world. The chances are good that if not in the autumn, then next year there could be a breakthrough. If, on the other hand, the dreaded second wave occurs, there is the threat of another lockdown and we would be back to square one. In my opinion, however, such a worst-case scenario is very unlikely.
Why?
The economy is opening up gradually. We have to learn to dance with the virus - two steps forward, one step back, if necessary. That means we must continue to be cautious. However, depending on how the infection develops, our everyday life will certainly return to normal. The only question is when and how many painful cuts the recovery will bring. For tourism and international air traffic, it will certainly be a tough summer, let us live under any illusions.
What does the new normality look like after Corona?
In my opinion, talking about a new normality does not quite capture the situation. The Covid-19 pandemic does not change anything, but reinforces existing economic trends.
You have to explain that to me.
Even before the outbreak of the pandemic, in many countries the economy was already growing slowly. In addition, there are low production costs, low inflation, negative interest rates, income inequality and high national debt. This will not fundamentally change. Take wages, for example: it is not to be expected that they will rise after Covid-19. And we do not expect that the oil price will rise above $50 a barrel again in the next few years. This means an increase in production costs is not to be expected.
To combat the recession, the central banks are currently intervening in the economy with economic stimulus packages worth billions. Yesterday (Thursday 4 June), for example, the ECB increased the volume of its bond purchases by €600 billion to €1.35 trillion. What impact does this have on inflation?
There are voices that fear a rise in inflation after the pandemic. But it is more likely that inflation will actually fall after Covid-19, with eurozone inflation falling to 0.1% in May. In the markets there is rather too little liquidity than too much.
Why?
What the central banks are doing is comparable to a blood transfusion, i.e. absolute emergency aid. Blood means liquidity for a patient, which is exactly what the economy needs now. All the money that the central banks pump into the economy makes up for the loss of liquidity in the first place, it does not turn into a surplus. The second argument is economic activity. Wage increases across the board, which could also cause prices to rise, are not in sight at the moment. On the contrary, many people do not know whether they will still have a job tomorrow. Another element is the low oil price.
What is your advice to investors in the current environment?
It is interesting to invest in companies that offer solutions to the problems of the future, for example in the areas of health, education or energy. It is important that these companies have a solid balance sheet and a good track record. Sustainability is key. Our sustainable investment framework covers two dimensions of sustainability: what businesses do - their business model and activities - and how businesses operate (their business practices).
How do you balance possible risks in the portfolio?
One way to balance risks through shares or private equity is real estate. In addition to classic stabilisers such as gold, we also recommend diversification in terms of currencies, for example with Swiss francs or yen. However, the long and short strategies of various hedge funds can also prove useful in this respect. This allows us to build a robust portfolio.
You said that the existing trends will not change much after the pandemic. Have you adjusted your portfolio anyway?
We were well prepared ahead of the crisis and only made minor changes. We first focused on asset liquidity. The only sectors and regions in which we have become more cautious are those that are heavily dependent on oil, since, as I said, the price of oil will remain at a low level for a long time to come. This is holding back development in certain countries in the Middle East, Eastern Europe and Latin America.
What about Asia?
We have increased our exposure to Asia, including our exposure to Europe and the United States. Sectors that we like are tech, healthcare and energy efficiency, such as climate-related investments.
You mentioned the low oil price. What is your view on equities in this sector, and are some voices now advising us to buy into it?
The only argument that would support it is that they are very cheap right now. But the prices can remain at a low level for a very long time. We've seen that in the financial sector, for example, over the last ten years. The other complicating factor is that the oil-producing countries can hardly agree on any form of cooperation, not even within OPEC. This means that even if demand for oil increases again in the future, stocks will still be too high, which will also have a negative impact on the price.
Now, large energy companies such as BP have announced that they will implement the energy turnaround and become CO2-neutral companies. Does this change your assessment somewhat?
We are currently underweight in this sector. However, we are watching very closely what is happening. Because even if these companies are part of the problem at the moment, they can become part of the solution. The companies are well positioned to find solutions, for example, for the advancement of electric cars.
Low interest rates are another trend that is likely to be exacerbated by the Covid-19 pandemic. How much longer will we have them?
Considering that inflationary pressures will continue to be absent and that the economy is only slowly recovering from the crisis, we expect that interest rates will still be at the same level at the end of 2021 as they are today. Certainly in Europe, but probably also in the United States. The central banks have no reason to rush to raise interest rates, after all they do not want to jeopardise the recovery of the economy. It's like when a patient is discharged from hospital: if they discontinue their medication too early, they may end up in intensive care again and all efforts have been in vain.
What is the role of politics in getting out of the crisis? German Chancellor Angela Merkel and her French counterpart Emmanuel Macron have announced a controversial reconstruction fund of € 500 billion.
This fund is an important step, precisely because it allows debts to be mutualized. The fact that Germany in particular, which has always resisted Eurobonds, is now campaigning for it is definitely a game changer. The new instrument is to be used exclusively to combat the corona crisis. However, if a new recession threatens in a few years' time, we now know that the EU has another instrument at its disposal with which to combat the crisis.
What do you have against the critics of this reconstruction fund?
The proposed financial compensation is fair. Italy will receive more money from the EU budget than Germany, simply because Italy was hit harder by the Covid-19 pandemic than Germany. In the next crisis this could also be the other way round. I think it is an important step that there is now a mechanism where there is not only national debt, but European debt. And it is positive that this is being used to help those who were hit hardest in the crisis.
The "frugal four", Austria, Holland, Sweden and Denmark have announced resistance to the proposal.
How the plan of Merkel and Macron will finally be implemented is still subject to negotiations. What is important is that those measures are implemented that will enable the economy to recover as quickly as possible. If the "frugal four" are not prepared to give in and if the economy does not recover, the pressure on the states will increase considerably. It will be tough, but an agreement is likely. Even though the "frugal four" will not sell themselves short. But this is not just about domestic policy. They want to signal to their voters at home that they won't agree to it without a fight. I expect a tough struggle similar to what happened in 2012 when the euro bailout was agreed
All these stimulus packages are likely to lead to an increase in debt. What will pay for this?
Sure, Covid-19 will increase debt levels. But the national debt was already high before that. Still, the debt will be paid, no question. Take Japan, the debt level is at 250% of economic output has grown, yet the country has no problems paying for it. In Italy, the share is 130% of GDP, but the government in Rome can also service its loans.
Nevertheless, the risk of insolvency is higher for Italy than for Japan.
What is important is not the amount of debt, but the interest that a country has to pay. Imagine that you have just bought a house. In view of the total debt, you could panic. This does not mean that you are immediately insolvent, at least as long as you do not lose your job. Because the monthly mortgage payments are lower than what you used to pay for your rental apartment. But to get back to the issue of national debt. Italy will not lose its job. The level of interest in relation to GDP is at its lowest level since the Second World War. What is also positive in Italy's case is that private savings are at a high level. There is still money, even if the state no longer has any resources at its disposal. There is no problem with debt repayment. The interest premiums are not the problem, it's what the states do with their debts.
What do you recommend?
If the states do not invest the additional funds from the European Union in a productive way, it would be at a loss. It is important to invest in infrastructure, education, technology and health. Governments must ensure the future of the next generations. We now have an historic opportunity to do the right thing.
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