The Covid-19 pandemic is forcing governments, companies and increasingly investors to wake up to an unpleasant reality: things won’t ever go entirely back to normal.
For a start, the pandemic has lit up the limitations of globalisation in bright neon.
Over the past 30 years western company outsourcing, particularly to China, helped build the latter’s economy, stack corporate profits, and supplied western consumers with a cornucopia of cheaper goods.
But these intricate supply chains have proven highly vulnerable to disease and populism alike.
Even before Covid-19 emerged, danger signs were mounting. US president Donald Trump continuously moaned the US was being taken advantage of and the need to bring jobs back. Countries like the UK felt similar populist urges, which helped lead to Brexit.
Then the pandemic hit – and underscored how vulnerable countries were to a break down in their supply chains. The fallout has led countries such as Australia to discuss returning some medical product manufacturing back home, while US tech company Apple could shift one fifth of its China manufacturing to India.
Others will surely follow, moving the production of key components closer to home – or at least away from China.
Such rebalancing offers possibilities and risks. Investors may be able to help finance companies that relocate their production and invest in others that benefit from such shifts. But these supply chain shake-ups will have unforeseen risks and push up production costs (there’s a reason the companies outsourced in the first place).
The pandemic has also underlined the danger of the long-known fact that too few people in the west or Asia have enough savings tucked away for a rainy day (or month). In this Covid-19 world, it's all too easy to lose a job – and very hard to managewithout one.
That could present asset owners and pension funds with an opportunity as the crisis eases: to encourage responsible investment and saving, both for emergencies and the more existential issue of retirement.
Of course, people who save more money don’t spend it on immediate goods and services. But if they invest it well, and especially support funds that support sustainability, innovation and job creation, it could offer the opportunities too.
Once the pandemic’s impact finally subsides or is alleviated by a vaccine (something that might not happen until 2022, if ever), other issues will emerge.
A key one will be an urgent need for economies to growth and jobs back on track as fast as possible.
A proven way to do so would be mass-scale infrastructure spending; the sort of thing countries across the world have long promised yet too rarely followed up with. Combine this need with the existential risks of climate change (it’s still happening, after all) and it’s likely that a lot of investment will be needed, particularly in energy sources and new technologies.
The trouble is, the cost of offsetting Covid-19 has stretched public purses to breaking point. Governments emerging from this crisis will be heavily indebted and feeling pressure not to borrow even more – despite interest rates likely remaining at extreme lows.
So, the world’s major asset owners, be they pension funds, life insurers or sovereign wealth funds, may find themselves under pressure to fund projects to revitalise economic growth and finance efforts to combat climate change.
Given the lack of good fixed income returns on offer, they may be willing to do so – provided the risk isn’t too high.
Traditionally asset owners try to avoid the risk of Greenfield infrastructure or real estate, but they might become more willing to do so if governments and multilaterals can offer appealing financing options for publicly guaranteed projects, or top up project returns to appealing levels.
On the private sector side, the likely lack of bond yields on offer (barring an inflationary spike) may lead asset owners to consider more venture capital-type approaches to smaller investments and start-ups as they seek to source the returns they want.
Added to that could be the potential for digital technology to de-aggregate and carve up all sorts of assets into investable chunks.
The post-Covid-19 world promises to be different, as governments, companies and investors seek new solutions to big problems.
For asset owners it promises to present some big challenges, but intriguing possibilities too. They had best get planning.