Living forward in a post-pandemic world

With the COVID-19 pandemic, the year 2020 provided one of the biggest challenges in a lifetime, but it also turned out to be rewarding for investors. Where do we stand as we start 2021?

Markets closed 2020 at all-time highs, with the Nasdaq 100 up no less than 44% on the year. These gains took many investors by surprise, and although the Credit Suisse Investment Committee bought back into equities in March 2020, the continuousness of the rally until year-end amazed even me.

As we enter the new year, monetary and fiscal policy in the Western world remain very loose because of high unemployment and nervousness about the fragility of the financial system. Incoming US President Joe Biden will be inaugurated on 20 January with an excellent team around him, in spite of continuing efforts by outgoing President Donald Trump and his supporters to change the election outcome. In Europe, the Brexit saga has come to an end with a compromise deal, as we expected. Of course, the UK will remain a satellite of the EU, like Switzerland, despite musings about sovereignty and a resurrected empire. Both developments are good news. China and much of Asia (though not India) are emerging from the crisis enviably well, while the Western world is badly bruised, both in absolute and relative terms.

Pandemic continues to take its toll

But it’s not over yet. The COVID-19 pandemic will continue to take a significant toll before vaccines are fully rolled out and able to prove their efficacy. This is why I am quite worried about the next two to three months of this winter and I think that, sadly, we will only go back to some kind of normality by the end of the third quarter. Unfortunately, some countries like Switzerland and the USA are still struggling with the pandemic, at disproportionately high human, social and economic costs that I believe will take years to overcome, recoup and recover from. I sincerely hope the West will learn its lessons and be better prepared next time.

What do we need to do to prevent a similar trauma in the future?

Good news in the price

As for markets, I think the year 2021 could be a bit more volatile than the optimists have it, as a lot of good news is already in the price. However, we are very unlikely to see a repeat of such rare cataclysmic market events as in February 2020 unless the virus mutates further into something very deadly or evades our vaccines. Overall, I believe we are probably in for two to three years of generally calmer markets, where things will begin to heal and return to normality and where everyone begins asking themselves: “What do we need to do to prevent a similar trauma in the future?” as we did after the Great Financial Crisis. I think the response will be bigger governments, more debt, higher taxes, more left-centrist governments, less populism, more government intervention in our daily lives, more restrictions on movement, hopefully better health care systems and preparedness. As a result, we are likely to see continued price inflation in real assets, especially equities and real estate, in the next two to five years.

Challenges deepened

What is very clear to me is that this pandemic has deepened many challenges in the Western world that we knew even before the crisis hit: increasing inequality in terms of wealth, income, opportunities and health care access; as well as technology and capital taking over more and more of labor’s role in a globalized digital economy. That’s not a great legacy coming from the second large global crisis in a little over a decade. Geopolitically, the world is continuing to shift from a Western-dominated global agenda to a multipolar world. China’s continued rise and Asia’s swifter and more successful handling of the pandemic illustrate this shift.

The immediate and most lasting impact of the pandemic will be on mobility. The sense that we can go everywhere and do whatever we want at any time has been lost, and maybe that is not so bad! Nature has reminded us that people moving around and gathering in large crowds as if pathogens among us are too small to do us harm is a thing of the past. I think it will take a long time before we feel comfortable again to enter a packed basketball or concert stadium or go on a cruise expecting rest and recovery from a stressful world. I, at least, find such thoughts somewhat worrisome, even with a vaccination. What the COVID-19 crisis has most promoted is our digital usage and interconnectedness through online media and thus, by default, “social distancing.” Globalization and socialization have truly moved online as a result of the pandemic.

Sustainability pushed to the fore

In my view, the result of all this will first and foremost be a somewhat lost sense of purpose about what world we are trying to build, where we were heading and where we are heading now. After all, we have just been reminded that there are severe limitations to our perceived degrees of freedom, mobility and prosperity if we are not careful with Mother Nature. In climate change, an even bigger crisis and challenge is waiting. If our ability to handle a virus is any indication of how successfully we may handle rising sea levels and dramatic weather changes as a consequence of global warming, then we will need more than rubber boots and umbrellas to protect us going forward. In my view, these challenges inevitably lead to questions of sustainability and what world we want to create for future generations.

Central banks lay ground for decent year for markets

Back to markets: Once we get through the next two to three months, I think 2021 will be a decent year in markets if central banks do not change their mind about their loose monetary policies. This still is key to markets, and only the inflation outlook can really change that. I continue to think that the coronavirus pandemic was a shock that amplified already prevailing deflationary trends in the global economy such as excess savings, demographics and technology pushing goods prices lower. As a result, policymakers boosted reflationary responses such as cutting interest rates to zero and implementing asset purchase programs. We are in “stealth monetization mode” now and will stay there for years. With rates low across the world, there is no more money to be earned on excess free capital and our savings are worth nothing unless we put them into risky assets. Only smart and creative investors will know how to continue to put their money to work.

We are in “stealth monetization mode” now and will stay there for years.

I believe that most of our clients will come to these same realizations. In the year ahead, central bank policies will continue to play a key role and determine the course of equity markets, which I believe will be up by the end of 2021. However, investors should not expect another 44% gain in the Nasdaq or another 16% increase in the S&P 500. Rather, they should start thinking about the laggards and dare to be contrarian.

Living forward

On the economic, health, humanitarian and social front, 2021 promises to be better than 2020 in almost every respect. However, in line with my favorite saying based on Danish philosopher Soren Kierkegaard, “Life can only be understood backwards; but it must be lived forwards.”