The world may look like a place that’s been fundamentally altered by the impact of the Covid-19 virus outbreak, but take a look at the long-term and several other themes are likely to dominate financial markets.
That is the view of Wouter Sturkenboom, chief investment strategist for Emea and Asia-Pacific at Northern Trust Asset Management. He joined AsianInvestor for a webinar that focused on six themes over five years that would underpin the foundations for financial markets.
The original webinar was published in February, but AsianInvestor caught up again with Sturkenboom on April 20 to discuss how much the coronavirus has impacted his predictions.
In the main, Sturkenboom believes that most of his views continue to hold, although the impact of the pandemic has changed the timing of some of them.
Fundamentally, Sturkenboom’s views on the coming half-decade centre on several macroeconomic themes: a restructuring of global growth (which the coronavirus has most certainly created); how rising irreconcilable differences between the US and China would undermine globalisation; a lack of inflation as technological advance keeps prices down; and a shift in the world's economic focus from an emphasis on monetary policies to fiscal policy solutions.
The other two themes are executive power play and the rise of climate risk, but both have taken more of a backseat in the current conditions.
“Over a multi-year perspective, the coronavirus has acted as more of an accelerant of the strategic trends that we outlined,” the Netherlands-based strategist told AsianInvestor. “We think that is particularly the case for de-globalisation.”
Friction between the US, the world’s leading economy, and China, which will overtake it for size in the next few years, dominated geopolitics in 2019. While it has taken a backstep amid the pandemic, Sturkenboom sees the divisions only increasing.
“Instead of having this continuing force of integration, we think that the trade wars – of which the one between the US and China is the most important – will continue,” he said. “That will first begin to stall globalisation and secondly cause it to go slightly into reverse.”
The blame that the US is assigning China for the outbreak of Covid-19 is likely to exacerbate such tensions, as may the possibility that US and European companies opt to shift at least some of their supply chains away from the country to other nations or back home.
DEFLATION AND RECESSION
The case for low inflation, or "stuckflation" as Sturkenboom calls it, is a little less definitive.
It certainly looks as if inflation won’t be a factor in the short to medium term, as people stay at home, companies reduce staff and cut salaries, and with oil prices having collapsed to record lows. Indeed, central banks such as the US Federal Reserve and Bank of England have cut rates to almost zero in an effort to keep liquidity in the banking system flowing.
Over the longer term, however, Sturkenboom notes that the chances of inflation may have risen due to the colossal bailouts and fiscal stimulus measures that governments across the world are conducting – replacing monetary measures.
“In 2022 and 2023 today’s stuckflation might turn inflationary but for the next 18 months that is clearly not the case,” said Sturkenboom. “So many people are out of jobs so output will drop a lot.”
Similarly, the strategist had predicted that a recession would eventually emerge – but not the depth of the economic drop that the coronavirus has caused.
The key question is how quickly the world can get to grips with the spread of the pandemic. Many economists and strategists have discussed whether the global economic recovery will be a V-shaped, a big dip followed by a rapid recovery, or a U-shape, with the dip followed by a period of recession (or even depression) before a strong recovery kicks in.
Sturkenboom doesn’t entirely agree with either scenario. “Our outlook is more like a square root shape,” he said. “We believe there will be a short V-shaped recovery as pent-up demand is met, but that this will quickly tail off and we will see slower growth than we had going into recovery. In the end, growth rates will probably end up below our already cautious growth expectation.”
How deep could the recession end up being? Sturkenboom confesses he doesn't know, but then again neither does anybody else.
“If you look at market predictions there’s an enormous dispersion in growth expectations,” he said. “I think that’s right; we don’t know.”
He is keeping a close eye on new coronavirus victim figures, with the hope that figures will emerge that the levels of new cases have begun to drop; evidence that the spread is being inverted by social distancing measures. “That will give us a timeline for when economies will begin to re-open. Hopefully, a recovery will begin by the third quarter.”
Northern Trust Asset Management estimates that company earnings will rebound from a very low base in 2021, with its predictions for this year below the market median and next year slightly above.
Given the huge uncertainties in the market, Northern Trust Asset Management has done relatively little to shift its suggested investment allocations overall, although Sturkenboom notes that it shifted its risk positions during the market drops.
“I realised that the sort of risk we thought we were taking going into the sell-off and the one we actually experienced during it were two different risk positions," he said. “We made the conscious decision to maintain that higher than expected risk exposure to benefit from an anticipated market bounce.”
The fund has just over half its mildly overweight risk position in US equities and high yield, while it is underweight in emerging markets, an asset class likely to remain subdued until developed economies begin to rebound. Northern Trust Asset Management is also keeping mildly underweight in cash and inflation-linked debt.
To listen to the original webinar, entitled "Six Themes, Five Years, One Outlook', published in February before the impact of the coronavirus was fully felt, please click here.