Looking Through the Pandemic
The sudden shock of the pandemic and the hurried reactions of monetary and fiscal authorities have created a wide range of possible outcomes in the near term. The nature of the current environment is likely to produce imprecise forecasts, leading to an uneven road to recovery. However, there were many longer-term trends in place prior to the outbreak that are worth exploring. Some of these will accelerate or decelerate after the pandemic, but let’s focus on three trends we think will be important for investors to keep in mind.
De-globalization: The trend toward de-globalization was evident prior to the pandemic as nationalist and populist movements gained momentum around the world; the exongenous shock of the coronavirus is likely to create even more national self-reliance. A lack of global coordination has been eye-opening as the bulk of the pandemic response has been largely country-centric. Granted, governmental authority is contained within borders, yet the proliferation of travel and transport allowed the health threat to move rapidly across the globe. Moving goods and people may be more cumbersome in the future. As countries circle wagons and
"Calamities tend to elicit tribal emotions such as fear and greed, and the autopsy of this current episode may create a more contentious atmosphere."
take care of their own people first, it remains to be seen how this natural reaction carries over into the post-pandemic world. Economic nationalism may be a theme we hear more about after the crisis subsides. Calamities tend to elicit tribal emotions such as fear and greed, and the autopsy of this current episode may create a more contentious atmosphere. While the Euro area has pooled its monetary system, it still needs to figure out if its fiscal system will follow suit. Relations with China may get worse. The potential for increased resentment or a call for reparations for economic damage incurred could change the social mood toward globalization.
Re-orienting Supply Chains: The trend toward lower cost, more efficient, just-in-time inventory management global supply chains appears to be increasingly vulnerable. It is likely more companies and governments will assess the risks of global supply chain disruptions and move more means of production onshore. The pandemic exposed how ill-prepared many governments, companies and individuals were. While this crisis is likely the extreme tail event that falls outside normal confidence intervals, it does highlight areas that are unprotected and need to be reassessed. For the U.S. government, there is likely to be a move toward onshoring production of certain medical supplies and pharmaceuticals. We could expect to hear more about these initiatives from a national security standpoint. Business models requiring component sourcing from multiple locations will likely revisit those sources to ensure companies have an adequate alternative supply or desire more direct control over key/vulnerable components.
Consumer Behavior: The parabolic rise in jobless claims and sheer nature of the shock means households are likely to be more cautious. The economic effect manifests itself in higher savings rates, which implies lower or slower consumption growth. However, other trends may see their rates of change increase. Social distancing and the discouragement of public gatherings may have some spillover impact on existing habits. Changes in work practices may accelerate. The work from home environment may persist as it relates to functions with little need for personal interaction. It may be more economical to have interactive positions in smaller office locations designed to enhance collaboration. Environments for more vulnerable populations, such as the elderly, may need to be re-examined, including a rethinking of nursing homes designs, or more adequate home care solutions. The benefits of technology, in the form of e-commerce, online learning and enhanced connectivity, are becoming more apparent and likely to extend beyond the re-opening of the economy. A renewed interest in health and wellness may carry over as well. With the deluge of information about the pandemic and various hygienic measures to maintain wellness, the benefits can extend beyond the individual. When people rally together for a common cause, the trend of rising social responsibility may also increase. The global nature of the crisis can bring home the fact that local actions can have global consequences—for bad and good.
Beyond these three trends, entirely new habits and patterns may develop, too. Although this spring season hasn’t felt like a new beginning, investors who don’t lose sight of longer-term trends may be able to better navigate markets hampered by near-term uncertainties.