Beware a political malaise
Part two of our series looking at how COVID-19 has changed investing and our views on markets.
The near-term implications of the coronavirus outbreak and ensuing global recession are still so uncertain that it is tempting to focus solely on the outlook for the rest of the year rather than the rest of the decade.
But as long-term investors, we know it is more important to understand the direction of the market than its daily or monthly movements. So what comes after the recovery? I believe that this crisis will not so much transform the world as accelerate the trends that were already reshaping it.
Take the long-term trend towards increased populism in our politics. In their paper “Going to Extremes: Politics after Financial Crises”, academic researchers found that, after a financial crisis, voters seem more attracted to extreme right-wing ideas and rhetoric.
Seeing a market crash occur alongside a pandemic, I also recommend the research of Kristian Blickle at the New York Federal Reserve, who has documented a link between deaths from the Spanish flu and the Nazi party’s share of the vote in German municipalities during the 1930s.
We very much hope never to see such extremism again – and perhaps furlough schemes have averted the worst political consequences of mass unemployment.
But with this wave of new government spending that is integral to the COVID-19 response, politicians may be more tempted now to use further spending to win political favour from voters. In our view, the longer the spending taps are flowing, the more likely we are to see inflation rise over time, making it harder for savers to earn real returns on their money.
From crisis, opportunity
It feels like we are not so much near the end of the present COVID-19 crisis, as at the beginning of an exceptionally tumultuous period in global markets and geopolitics. But as investors we must nevertheless look for opportunities as well as threats, and I have no doubt that the upheaval will present plenty of both.
For example, if companies are focused on paying back much of the debt they have borrowed during the crisis, this may be positive for investors who hold company bonds as the companies will be reducing their levels of risk.
In company shares, we believe we are entering an environment in which technology will be seen as a strategic industry. How many of us are suddenly much more familiar now with things like Zoom and other video communication tools or are making much more of our purchases online? These are still likely to be used after the lockdowns are lifted and we believe that the companies best set up to deliver these services may perform well in the future.
Our longstanding approach of “prepare, don’t predict” is likely to prove more valuable than ever as we contend with these forces shaping the world for better and worse.