One year corona crisis

It has already been more than a year since the corona pandemic began. The crisis had an enormous impact on everyday life and had a massive impact on national economies on a global scale as well as on the financial markets, too. A lot has happened in these twelve months in every imaginable dimension. With regard to the capital markets, it was and is above all the dual stimulus of fiscal and monetary policy interventions by the central banks and the major countries to an unprecedented extent that has shaped events. The underlying market sentiment on is also being buoyed by the Covid-19 vaccines produced in record time, which give hope of a foreseeable end to the pandemic. On the other hand, new virus mutations continue to create a high degree of uncertainty. Where do we stand today after one year in crisis mode?

High debt will be a legacy of the corona crisis

In the last twelve months, the budget deficits of the major economies have exploded and the debt ratio has skyrocketed. The focus has been solely on alleviating the macroeconomic impact of the corona crisis and avoiding a depression. We expect this policy to continue in 2021, and central banks and governments will continue to put everything on the line. Rarely have there been so many new issues of government debt in such a short period of time. Central banks are financing these huge budget deficits and the major G7 countries will continue to have the full support of the monetary authorities. In Japan, 75% of the “corona new debt“ was bought by the Bank of Japan and the balance sheet surged as a result. A similar picture can be seen in the United States (57%), the Eurozone (71%) and the United Kingdom (50%). We are thus very close to a control of the yield curves by the four major central banks (Federal Reserve, ECB, Bank of Japan and Bank of England). However, it is not only the sovereigns that are showing an increase in debt, but also other areas such as companies outside the financial sector (graph 1).

The mountain of debt that now exists, which is higher in relation to GDP than it was after the Second World War, should not be underestimated in the medium to long term. Indeed, according to the renowned Harvard economists Reinhart and Rogoff, there is empirically a negative correlation between economic growth and high debt ratios. The higher the debt burden, the less growth can be expected from an economy in the medium term. In our view, it can already be stated that the enormously high level of debt will be one of the legacies of the corona crisis.

Central banks are essential for debt servicing

The biggest central banks not only play a crucial role in providing additional financing for budget deficits, but are also at the center of ensuring debt sustainability one year after the onset of the corona crisis. Following the huge increase in debt mountains, central banks are needed more than ever to meet interest payments. It is only because the yield curves in developed countries are currently so low that neither sovereigns nor corporates are having trouble meeting their interest payments, even though the absolute debt pile is very high. However, a rapid rise at the long end of the yield curve could quickly end the deceptive calm on the capital markets.

Rising inflation risks

After politicians acquired a taste for government deficits being covered by central banks in 2020, inflation risks have increased in recent months. Future inflation expectations in the United States have even risen to their highest level in two years (graph 2).

Following the announcement (and likely implementation) of further corona stimulus packages by the new US administration under President Joe Biden, we believe that the rise in inflation expectations is not surprising for the moment. It also does not seem to be a cause for concern (yet) for the Federal Reserve. Nevertheless, we think that another rapid rise in inflation expectations could well unsettle the capital markets. As a second legacy of the corona crisis, we see higher inflation rates in the medium to long term.

Barbell strategy or both

We continue to believe that selection is far more important than allocation in the current year. The classic barbell strategy – both and – is likely to be successful in 2021. On the one hand, we focus on companies that benefit from the cyclical upswing and, on the other hand, on companies that emerge as crisis winners due to long-term trends. We presented both scenarios as themes “Strong winner recovery 2021“ and “The Winner takes it all“ in our “Outlook 2021“ (dated December 9, 2020).