Quarterly review, Q3 2020: making sense of the unprecedented

Staying in the present

Luis de Léon was an Augustinian friar and one of Spain’s greatest poets. In the early 1570s, while lecturing at the University of Salamanca, he was arrested by the Inquisition, which imprisoned him on a charge of unorthodoxy.

It would be four years before he re-entered the classroom, having at last been exonerated and released. Famously, he resumed his teaching with an opening remark that would become one of the most celebrated lines in Spanish folklore: “As I was saying...”

Will the world one day find itself able to shrug off the COVID-19 crisis with comparable insouciance? As the months pass and clarity as to the prospective nature of recovery remains elusive, a Léon-like return to normality grows ever less likely.

It is still essential, though, to try to make sense of circumstances as we understand them. As asset managers, we must keep pace with – and even ahead of – developments. While daring to look ahead, we must attempt to discern potential lessons and parallels in both the past and, crucially, the present.

Invesco’s thought-leadership outputs during the third quarter of 2020 have sought to achieve these aims. They have also reflected our vital commitment to diversity of thought, as the following selection illustrates.

Bulls, bears, obstacles and accidents

We commented some months ago that the macroeconomic outcome of the pandemic could be seen as a “Great Compression” – a worldwide depression or recession of unprecedented speed and depth. This reality is now upon us in the form of what Global Market Strategist Arnab Das describes as “the most abrupt, deliberate downturn on record”.

Das contemplates probable pathways out of the crisis in a paper entitled COVID-19; the Great Compression; Square-Root and Swoosh-Shaped Roadmaps for Recovery. Using a simple model to map GDP scenarios, he delineates a number of possible routes.

The first two are bullish and rapid: a best-case V, as encouraged by the swift discovery of a vaccine, and a next-best U, indicative of a slightly slower reversion to normality. By contrast, the least appealing are bearish and treacherous: an L-shaped recession, as defined by persistently weak confidence levels, and – worst of all – a calamitous, W-shaped trajectory characterised by fresh waves of infection, renewed lockdowns and even financial crises.

Between these extremes lie two middle-ground alternatives: a swoosh-shaped recovery that is slow but sustained and a square-root-shaped recovery consisting of a precipitous fall, a rebound and a levelling off. The second of these could lead to long-term changes in major economies and the international system.

Whatever the road ahead, warns Das, obstacles and accidents alike are liable to prove significant. Bond yields, currencies, commodity prices, labour income and corporate earnings will all feel the effects, with disparities across regions and sectors intensifying – especially if the putative resolution turns out to be notably bullish or bearish.

Churn and change

In How Far From Normal?, a paper in their Uncommon Truths series, Paul Jackson and András Vig make the case for a recovery that is likely to be faltering. They point out that even today, more than six months since the crisis began, the outlook is “murky”. The worst may be over, they say, but normality is still some way off.

Jackson, our Global Head of Asset Allocation Research, and Vig, our Multi-Asset Strategist, weigh up factors such as GDP growth, mortality rates and the stringency of policymaker responses to the virus. They suggest that China, relatively speaking, might be said to have had a “good” pandemic, while many European countries have conspicuously suffered. They conclude that diversified asset strategies are still prudent and that hopes of a strong European rebound seem doubtful at this stage.

In a separate paper, Virtual Clusters Favour Regions Over Large Cities, Jackson and Vig explore several aspects of the global reaction to COVID-19 and ask whether any substantive “new normals” could endure. While conceding that many are likely to fade, they contend that some of the major shifts witnessed in recent months may be here to stay – bringing far-reaching implications.

In particular, they believe that the rise of remote working will lead to a re-emphasis on regional economies, at the expense of large cities. The latter “are unlikely to die but could be repurposed”, they say, adding: “We believe that they will continue to be hubs for the arts and entertainment but that falling accommodation costs may allow them to be repopulated by the younger generations that cannot currently afford to live there.”

Jackson and Vig explain that, while old habits tend to die hard, technology is now eminently capable of underpinning lasting change. Specifically, the means to migrate from physical to virtual clusters not only exists but has been shown to be viable. “If there is less need to be physically present to fulfil an operational role,” they say, “we have greater freedom to choose where we live and where we spend our money. This could permit a dispersal of workers, thus reversing the concentrations so prevalent during our lifetimes.”

From high tech to humanity

Technology has increasingly been in the spotlight for another reason as Q3 has unfolded: having fuelled global equity markets’ rally, tech stocks have witnessed a sizeable sell-off amid mounting fears of a bubble. In Three Reasons Why This Isn’t Another Tech Bubble, part of her Weekly Market Update series, Chief Global Market Strategies Kristina Hooper compares the present situation with that of the late 1990s and early 2000s and argues against the idea that a new burst is imminent.

Hooper stresses that today’s interest-rate environment is very different; that various key themes – foremost among them remote working, e-commerce, artificial intelligence, automation and fintech – support ongoing growth; and that progress in the fight against the virus should be positive for stocks in general. “That doesn’t mean there won’t be more down days or higher volatility,” she says, “but I believe in the longer-term prospects for this sector.”

Finally, we should not forget the “human” cost of this crisis. COVID-19 has further crystallised the importance of the greater good – posing questions about companies’ relationships with clients, employees, suppliers, communities and society as a whole – and has also re-exposed what has been called “the pandemic within the pandemic”: inequality.

We look at this issue in Tackling Inequality Through ESG and Active Ownership, a paper examining the huge part that investors have to play in addressing decades-old inequities thrown into sharp focus by the events of 2020. The authors outline how inequality can be framed in ESG terms and how responsible capital allocation and shareholder action can help narrow the gap between “haves” and “have-nots” by pursuing goals whose benefits extend beyond the bottom line.

All things considered, it is unlikely that any of us will ever be able to dismiss this year’s tumultuous challenges with Léon-like indifference. Time alone will tell. For now, above all, we can only strive to maintain a flow of relevant, informed, measured insights as this extraordinary situation, with its many twists and turns, continues to take shape.

Disclaimer: I work at Invesco. All views and recommendations in this article are solely my personal opinion. They may or may not coincide with company opinion but should never be interpreted as Invesco company statements.