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WeekWatch -‘economists are busy predicting how quickly countries around the world will bounce back from the economic damage done by COVID-19’ April 2021

WeekWatch -‘economists are busy predicting how quickly countries around the world will bounce back from the economic damage done by COVID-19’ April 2021

As vaccination programmes gather steam, economists are busy predicting how quickly countries around the world will bounce back from the economic damage done by COVID-19.

Last week, the IMF upgraded its world economic growth forecast for the second time in three months, although it also warned about rising inequality and a gap between advanced and lesser-developed economies. However, one of the most striking parts of its update was its prediction for the speed of growth in Asia, where it expects the regional economy to grow by 7.6% this year.

Data also showed last week that the Chinese economy performed well during the first few months of this year.

“The Chinese economy has been exceptionally strong ever since COVID-19 was brought under control,” noted Martin Hennecke, Asia Investment Director at St. James’s Place. However, he notes that the first-quarter figures are slightly distorted by the ‘low base’ effect, because the first quarter of last year (which the recent numbers are compared against) was especially low due to COVID-19.

Hennecke added: “In fact, real growth actually slowed slightly when compared with Q4 2020, but in my view that’s a positive, since China has deliberately sought to cool bank loan growth, deleverage generally, reduce the budget deficit from 3.6% to 3.2%, and tighten IPO standards, to mitigate overheating and bubble risks. In the medium to long term such prudence might well enable a higher level of stability.”

For investors, uneven levels of recovery around the world should underline the importance of diversification. By investing across different countries and asset classes, you lower your exposure to any one type of investment, which is an important way to manage the level of risk you are taking.

Last week, Wall Street’s VIX index, which measures expected volatility in US stocks, fell to its lowest level in roughly a year. Strong earnings results from banks and other financial companies helped push US stocks up.

Similarly, London’s FTSE 100 Index of large UK companies reached its highest level since early last year. In another sign of the UK’s recovery, online job adverts are now at their pre-pandemic levels.

While markets were more optimistic last week, the past few months have been characterised by plenty of uncertainty about the outlook of the world economy. Investors have been trying to assess the likelihood of higher inflation, the threat of new COVID-19 variants, and lofty valuations for certain sectors of the equity markets (such as large technology businesses).

Over the past year, there has been a surge in the share prices of companies that benefited from the pandemic. Recently, this trend has reversed somewhat, with the share prices of companies that are more related to the health of the economy (such as banks, energy companies and airlines) enjoying a revival.

While investors who bet heavily last year on fast-growing technology stocks were rewarded, the recent ‘rotation’ in equity markets may herald a shift in markets, wrote George Droulias, an Investment Analyst at EdgePoint, which co-manages global funds for St. James’s Place.

“One of the best-performing investment strategies in 2020 was simply buying businesses that had the fastest revenue growth without any concern for any other fundamental or valuation measures. In 2020, investors became enamoured with ‘work from home’ stocks and rapidly growing sectors such as electric vehicles, green energy, online gambling and cannabis.”

However, he argues that as the world emerges from COVID-19, the use of tried-and-tested financial principles will return as the best method for seeking long-term investment returns. Droulias added: “Behaving like a rational business person wasn’t rewarded in 2020, but it is and will continue to be important over the long term. Much like our social behaviours in 2020, we think certain stock market behaviours in 2020 were an anomaly. In turn, if investors want to set themselves up for long-term success, they should continue to focus on sound investing and business fundamentals, and put little emphasis on the ‘lessons’ learned in 2020.”

EdgePoint is a fund manager for St. James’s Place.

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