Chief Investment Officer, Statewide Super
The COVID-19 pandemic is the deepest, non-credit based, global economic crisis to hit the economy since the oil crisis in the 70s. We will no doubt debate the policy response for years to come, but we should note we are still living it and it’s too early to tell how this will play out.
From a selfish South Australian or even Australian point of view, we have thus far managed to “flatten” the curve and thankfully, we are reopening the economy much earlier than planned. The global economy is also in the process of opening up although, many are worried about second outbreaks and the fact that we are at least some 6-18 months away from a vaccine.
The damage to the underlying economy will unfortunately be extensive. The mini depression of March-May indicate unemployment, bankruptcies and for lack of a better word “commerce”, that will take years to bring back to pre-virus levels. Some sectors like travel, tourism and even international education, will suffer for a much longer period as they learn to adapt to a closed off-world. I believe we will see a longer “U” shaped recovery as all businesses and households take time to adjust toward the new realities. The financial markets themselves may behave more like a series of “W” shapes as they under and overreact to various changes in the economy and hope for a vaccine breakthrough. The markets haven’t really factored in a world where there’s no vaccine or a second and third outbreak in the virus.
Policymakers have reacted with sufficient speed in terms of budget stimulus measures, relaxing supply-side regulatory constraints and central bank intervention. On all counts, the response from policymakers, except the budget stimulus measures, has been sufficient. I do not worry about moral hazards or an inflation outbreak in a world dominated by collapsing aggregate demand and high private-sector debt. The best way forward is to make sure there’s some semblance of a thriving household and business environment as we move well past the initial lockdowns. Making sure there’s animal spirits is far more important at the moment than worrying about “zombie” businesses or propping up “artificial” employment via government handouts.
In terms of the updated Australian federal budget stimulus packages, there’s much more to do. They should remain in place longer, in order to kickstart the economy. The 1930s depression is a case for relearning our economic history. Until the outbreak of the Second World War, policymakers in the 1930s tightened fiscal and monetary policy too early and enacted ruinous tariff barriers/competitive currency devaluations. I sincerely hope we do not do the same again, but the recent commentary by the Federal Treasurer on tapering stimulus packages plus emerging trade wars with China, gives me some cause for concern.
Presently, the most appealing areas for investing post this crisis will be in credit and equity recapitalisations of businesses. The special situation of investing up and down the capital structures of businesses burdened with too much debt will provide decent risk-adjusted prospective returns for the patient investor.
We are thankfully restarting the economy, but the new environment will be constrained and volatile for a while.
The above information was prepared by Con Michalakis, Chief Investment Officer of Statewide Super. The opinions expressed are the author’s own, do not reflect the official view of Statewide Super and should not be construed as financial or investment advice.