As we slowly emerge from the worst of the pandemic, global economic recovery is taking place; nonetheless, we can expect it to take years to close the output gap (the shortfall in potential between the projected & actual real GDP).

The US$1.9 trillion stimulus (including $1400 cheques for most Americans) proposed in the US appears likely to pass as the budget blueprint was approved by the Senate, with Kamala Harris casting her first tie-break vote as Vice-President.

If the vaccines work well enough & are distributed widely enough this stimulus combined with rising consumer demand & supply constraints could spark inflation. There could be far more money than the economy can handle and quite possibly greater than the output gap. There is a possibility, however, that the stimulus proceeds could go into debt paydown, savings, or non-discretionary spending, particularly if consumer confidence dips.

In Europe, France is optimistic that the European Commission will sign off on an innovative plan for helping companies through the post-pandemic recovery. This is a program to partially guarantee billions of euros of participatory loans to improve corporate balance sheets & encourage borrowing for investment. From a government treasury perspective across all countries providing stimulus, this raises concerns of a debt overhang when this is all over.

The WHO has recommended the Astrazeneca vaccine for all adults. Although there remains some doubt over how much protection it provides against the South African variant. In the first 2 months of global vaccinations 148m doses have been administered with 39m further people getting a dose every week. The top 8 vaccines have contracts to deliver 7.9bn doses in 2021.

Distribution remains the primary challenge amongst all countries of varying wealth. COVAX, which is a global coalition, is expected to provide 1.8b doses to 92 countries proportionately to their populations. In the UK, Prime Minister Boris Johnson announced a road map to lift national pandemic restrictions, including socializing, shopping, & traveling to work, while reopening schools from March 8th. At the same time, the UK is tightening quarantine restrictions for ‘red list’ arrivals.

Despite rising markets, looking at fund flows tells us that investors have, understandably, been risk averse in 2020 investing more heavily in bonds & money market ETFs/funds vs. equities. Given the low yields being given by traditional fixed income sources, we believe it makes sense to have a bias towards equity in particular given the superiority of the equity earnings yields over fixed income.

Equities remain relatively inexpensive compared to fixed income and will continue to be favored by the increased money supply. The challenge, at least in the US, remains index concentration where 5 companies represent 22% of the S&P 500 (Apple, Amazon, Microsoft, Alphabet, & Facebook).

The key to success in this recovery will remain diversification across asset classes, consciousness of valuations, and minimizing any speculation or unnecessary risks.

Mark Donnelly