Navigating uncertain waters: Preparing for a post-pandemic world

By: Dr Michael Hasenstab, Franklin’s chief investment officer, Templeton Global Macro

We are now in the early stages of a downturn that will be more profound, in terms of economic and social magnitude, than the global financial crisis (GFC). Global growth is expected to experience a contraction five times what was felt in 2008.¹ Meanwhile, growth in the US will likely double its 2008 contraction to the downside. Changes in public health strategies are likely to forever alter how business is done and society functions.

The policy response so far has been substantial from both the fiscal and monetary sides. However, already stretched deficits and central bank balance sheets across the developed world will likely present a constraint on stimulus efforts.

Moving forward will be challenging from an epidemiological and economic standpoint. Considering the potential paths ahead, we see a gradual reopening and recovery as the most likely scenario. Pursuant to this view, we see US unemployment spiking in the mid-to-high teens this year and remaining elevated over the medium term due to delicate business dynamics that will be seriously tested during the lockdown period.

When we emerge from the other end of this arduous tunnel in terms of public health, several critical macroeconomic challenges will persist. In addition to elevated public debt levels and vastly expanded central bank balance sheets, the global economy will struggle to gain traction with sluggish demand from developed markets (DMs) and a more cemented move away from globalization. From this, we expect slower growth in global trade, as well as divergent paths among emerging markets, where those with fewer external vulnerabilities and more domestic resilience will lead the pack.

We are, furthermore, likely to emerge from this pandemic more polarized economically and politically, as wealth divides and populist tendencies continue to burgeon. Add to this the nascent inflationary pressures baked into swirling promises of endless money creation, and we end up with the picture of a future with highly uncertain economic outcomes. We may need to wait years, if not perpetually, for a return to normalcy.

In such an environment, with low and negative yielding debt piles growing around the world and shifting correlations between asset classes, we believe traditional investment positioning strategies should be reconsidered. We are shaping our investment approach to this crisis in two distinct phases. In this first phase, where economies reel from the impacts of lockdowns, we see value in traditional perceived safe-haven assets, such as the Japanese yen and the Swiss franc. This will be a period of marked difficulty for emerging markets. However, those economies will not all default, and as the more resilient markets start their road to recovery in the second phase, we believe new investment opportunities will emerge. We are currently preparing for the risks and opportunities that will arise in the post-pandemic world.

Download the PDF to read the full story

¹ Source: International Monetary Fund (IMF), World Economic Outlook, April 2020