Macro Update, 7th February 2021

Updated: Feb 12, 2021

This first macro update is being written during the economically straining event of the Coronavirus crisis.

We are now almost a year on from the first lockdowns that put the global economy on hold, but we are far from out of the woods. Our global economies look fundamentally shaky. Trillions of dollars are being injected into the global economy via various central banks, in an effort to bridge our economy to a safer environment for when inoculations allow us to re-open. This strategy seems like the only thing we can do, which explains why much of the focus over the recent weeks has been on getting virus numbers down and controlling new variants in areas like South Africa.

It is quite evident that loose monetary policy will remain for a while, with negative interest rates on the minds of many central banks as a maneuver should the current <1% rates on the majority of government debt not serve a sufficient buffer if the situation worsens. On the jobs front, there continues to be a large disparity between sectors. Industries in the Travel, Hospitality and Events sectors continue to struggle creating heavy job losses. However, most sectors have found ways of moving work online. In the UK, unemployment is tracking at around 5%, up from its recent low of 4%. This would arguably have been much higher should the furlough scheme and other support systems not have been put in place. However, the BoE is expecting the unemployment rate to tick up to around 7.5% later this year as the fiscal stimulus and furlough schemes start to wind down. In the US, the unemployment rate soared at the start of the crisis to above 13%, however, after many months and lots of government stimulus, this has now reduced to 6.3% in January.

What does all this mean for us?

The Covid-19 crisis was a supply led recession, which is a little different to the typical demand led recessions seen in the past. Whilst the job losses are unfortunate and poverty has sadly been accentuated by the pandemic, with many people critical of governments poor handling of the situation, the unemployment rate has been kept reasonably stable arguably by government action. A proportion of people have managed to reduce their costs and debts due to working from home and savings rates, particularly in the US, are at all-time highs. This all points to a healthy overall consumer, especially in the US, with wallets flush and ready to spend. The problem is the lack of things to spend on. Contrast this to a typical recession, where a wider range of consumers are fearful of losing income, who then tighten their belts and stop spending. Much more has to be done post this sort of crisis to get consumers spending again, and incentivise corporate investment.

We do, however, need to be aware that this environment is being propped up by the government printing press. Quantitative easing (where the government creates and prints money to inject into financial markets) at such a scale cannot go on forever unless you are prepared for hyperinflation. It is important that we recognise that we are at the mercy of science to reduce the burden of Covid-19. Should science prevail, and our vaccine roll outs conquer the virus, I would expect a very strong consumer driven global rebound, which would be very good for our portfolios. However, if new variants take hold, further shutting down global economies, this would be obviously detrimental to company prospects. Some governments would lack the fiscal ability to stimulate their economies and the bridge back to normality would risk collapse. This scenario would be dire for markets.

Each scenario has a probability of occurring. It would be a waste of time trying to predict the outcome with any effectiveness, so I will be personally adhering to the below points to retain a level of caution over the coming months:

● No leverage or debt to fund trades (you don’t want to be in debt on potential investment losses);

● Take a long term horizon — volatility could be coming our way;

● Prepare for inflation — stay out of companies that have low margins or cannot raise prices;

● Remain in quality;

● Balance portfolios for Lockdown/Quarantines with exposure to re-opening.

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