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26.11.2020    Insight

Winter of Discontent, Spring Recovery, Secular Shifts Beyond

We have a multi-temporal framework for thinking about the world: winter of discontent, spring recovery and secular shifts beyond.

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We have a multi-temporal framework for thinking about the world:
  1. Winter of discontent: Near-term, we expect more economic softness as the virus rages on in the developed world and lockdowns continue to affect economic activity. Markets have been strong and may be subject to pullbacks and volatility ahead.
  2. Spring recovery: 2021 offers the prospect of a powerful economic recovery once the various virus solutions normalise growth and as economies continue to benefit from the tailwind of still accommodative monetary and fiscal stimulus.
  3. Secular shifts beyond: Medium-term, a range of secular forces are taking shape that have the potential to fundamentally change the investment horizon; winners and losers will remain an operative theme, creating opportunities for the active investor.

At the time of writing, the virus continues to spread and while deaths and hospitalisation rates are lower than they were earlier in the year, partial and full lockdowns will likely continue. Economic growth will be negatively affected as we come into year end and early next year. More pain will be felt, particularly as the worst-affected and typically labour-intensive areas of leisure, hospitality and travel struggle to survive. Those in the lower-income segment of the economy continue to suffer the most.

The timing of the recovery next year is, of course, dependent on the vaccine roll-out. The logistics of global vaccine distribution remain a challenge, while longer-term efficacy and duration are still unknown. The price point of the Oxford vaccine is encouraging, but wide-scale equitable availability, including to developing countries, still needs to be addressed. Volatility will remain a feature of markets if investors become overly optimistic about forward prospects, only to trade lower if too-positive expectations on the vaccine roll-out disappoint.

However, the emergence of not just one but multiple, highly effective vaccine solutions offers an end game to the pandemic. Hence, a winter of discontent will be followed by a spring of recovery sometime next year. Our view is that pent-up demand will be bolstered by high savings rates and an overwhelming desire on the part of consumers and businesses to renormalise. Further fuelled by still-accommodative fiscal and monetary policies globally, there is potential for above-average global growth at some point in 2021, with a concomitant sharp earnings recovery.

Removal of US election uncertainty and confirmation of President-elect Biden’s victory are also market positive. The nomination of former Federal Reserve Chair Janet Yellen as Treasury Secretary adds to growing optimism around greater fiscal stimulus in the US. A Biden presidency augurs well for less fractious relations, both at home with Congress and abroad.

As the recovery takes hold, we think market participation will be broader, as more countries, sectors and capitalisations benefit from the rebound. Such increased market breadth will be positive for a more durable stock market advance from here.

Beyond 2021, there are a range of other long-term secular shifts. Many are intertwined and linked to the evolution of policies: the US under Biden and China under President Xi and their relationship. While we cannot profess to see all the implications, we believe that the evolution of these trends will affect different countries and companies in different ways. These trends are broadly categorised under the following headings:

  1. New Growth Regime
  2. The Great Reset
  3. Inflation Risk
  4. Digitalisation
  5. Sustainability

In the remainder of this piece, we peer into 2021 and beyond and share our thoughts on the investment implications of this rapidly changing landscape.

Broadly we recommend:
  1. Clients use both public and private markets on a global basis to access evolving trends.
  2. Changing economic forces and market dislocations will create greater dispersion between winners and losers.
  3. Active management and a keen understanding of bottom-up dynamics will prevail over broad-based, passive strategies.
Long-term Secular Themes

New Growth Regime

We believe that growth in the developed world will continue to be supported by a shift away from austerity towards non-orthodox macroeconomic policies inspired by Modern Monetary Theory (MMT), including increasing acceptance of higher levels of government debt and deficits. Governments around the world have already responded to the pandemic by borrowing and spending on a vast scale, equivalent to 12% of world GDP. Twelve years ago, in the financial crisis, monetary policy did the heavy lifting in supporting growth. Now, with interest rates near zero, the burden will continue to fall on fiscal policy.

Leading central bankers, including the US Federal Reserve’s Jay Powell and Christine Lagarde at the European Central Bank, are demanding more, rather than less, support from fiscal stimulus. The IMF has also been joined by other multi-lateral institutions in urging governments not to prematurely cut off the recovery. Their view is that fiscal spend focused on infrastructure and investment can improve the long-term productive capacity of economies and create much needed jobs.

As the IMF argues, countries that have the choice should keep borrowing, and while global public debt is likely to hit a record high of more than 100% in 2021, by 2025 overall deficits will likely be below the levels before the pandemic, as long as the cost of servicing government debt stays well below the nominal GDP growth rate. Governments are being given the green light to invest their way out of the crisis, using the opportunity of the pandemic to catalyse longer-term growth.

We have seen this before. At the end of World War II, debt levels rose to an excess of 100% in many parts of the developed world; four decades of fiscal expansion later, public-sector borrowing shrank to 30% by the mid-1980s, close to the lowest-ever level.

This is not to say that the limits to public borrowing have been removed. The risks are numerous:

  1. If economies fail to recover to pre-pandemic rates of growth, governments could be faced with a permanent imbalance between the burden of public debt and the economy’s ability to finance it.
  2. The picture could worsen further still if inflation were to rise markedly, driving investors to demand higher yields on government debt and higher discount rates on equities and future company cash flows.
  3. Past debt crises have come out of the blue, as bond markets can quickly change their minds about fundamentals. Zero to low-interest rates can cause excesses and imbalances as the relationship between borrowing risk and the price of that risk become unconnected, creating a spirit of moral hazard.

But for now, borrowing and spending remain the mantra.

“First you worry about fighting the war, then you figure out how to pay for it” –– Carmen Reinhart, Chief Economist of the World Bank, October 2020

Hence, we believe that the low-growth regime of the past decade is likely behind us as long-term fiscal support, ongoing monetary accommodation and the prospect of new vaccines combine to give the US, and indeed the world economy, the best chance at achieving above-average growth for several years to come.

The Great Reset

The timing, use and magnitude of fiscal support will vary from country to country. We also believe that fiscal spending will become more ‘social outcomes-based’. Governments around the world are increasingly seeing the crisis as an opportunity to address long-term structural challenges of income inequality and climate change as they prioritise a more inclusive and sustainable economy.

At the World Economic Forum this year, Klaus Schwab, Founder and Executive Chairman of the Forum, argues that nations must redefine their social contract, working with as opposed to against nature. Governments need to ensure that as economies recover, they are more equitable and resilient from an environmental perspective. Companies will also need to play their role, moving from shareholder to stakeholder capitalism. In short, he calls for a “Great Reset” of capitalism.

The aims may appear overly futuristic, but the themes are broadly echoed by leaders of the world’s two largest economies: President-elect Biden and President Xi. However, a focus on the greater good will also be fused with national self-interest as both the US and China strive to achieve greater self-reliance, innovation and domestic growth.


In the US, President-elect Biden will try to increase public spending, with a pandemic recovery package and a programme of green infrastructure, healthcare, education and R&D expenditure. Other Biden policies are looking to strengthen the position of workers, including a higher federal minimum wage and paid family and medical leave.

Biden’s $700bn “Buy America” manufacturing plan has an ambition to create more than 18.6 million jobs, seven times more than Trump, and move the minimum wage to $15 an hour. He has also emphasised the onshoring of production, which has the added benefit of stimulating domestic investment and jobs.

So far, Biden’s choices for his key cabinet positions are in line with his policy agenda. Most important is Janet Yellen nominated as Treasury Secretary. The former chair of the Fed, who is widely respected for her views on labour economics, has openly supported the views of the IMF and others: as long as interest rates remain low, the US government has considerable fiscal latitude for new stimulus and investment.

“While the pandemic is still seriously affecting the economy, we need to continue extraordinary fiscal support, but even beyond that I think it will be necessary. We can afford to have more debt, because interest rates will probably be low for many years to come.” –– Janet Yellen, October 2020
However, Democrats now have a slimmer majority in the House, and the Georgia Senate race is still pending to determine who will control the Senate. Most expect the Republicans to maintain their current majority. A Biden presidency with the Senate controlled by Republicans may see the most ambitious of Biden’s “shock and awe” fiscal policies tempered. But with 10 million Americans still unemployed and more than 21 million on some form of benefit relief, ongoing support for the economy and the most displaced will likely enjoy bipartisan support.

A Biden presidency will also usher in less uncertainty in international relations, based on a more centrist, unifying and multilateral approach. The President-elect has signalled that he wants the US to re-engage with multilateral organisations, including the World Trade Organisation.

Biden will also take the US back into the Paris Accord and prioritise green investment, including looking for how the US is to achieve 100% clean-energy savings and net-zero emissions no later than 2050. Biden wants to install 500,000 charging stations for electric vehicles across the country by 2030. The nomination of John Kerry, who helped to orchestrate the 2015 Paris climate accord, signals that the issue will rise to the top of the US policy agenda.

Hence, with Biden at the helm for the next four years, most expect stronger cooperation across leaders in the US and abroad, a greater emphasis on addressing income inequality and job creation at home, and a strategic focus on catalysing investment in the green economy. From a market’s perspective, Biden will be less likely to be able to push through material tax increases or changes in business regulation, if he faces a divided government, and hence this is also seen as a positive.

All of this remains US market friendly.


China has achieved a true V-shaped recovery from the pandemic and it will continue to surprise on the upside in growth terms as we head into the 100th anniversary of the Communist Party next year. The Central Committee of the Communist Party of China (CPC) has recently published its economic focus for the 14th five-year plan from 2021 to 2025, as well as its strategic agenda for the next 15 years.

The plan focuses on long-term goals and China’s ambition to be a global leader in innovation by 2035. According to the communique, by then China aims to use its fiscal tools to achieve new industrialisation, urbanisation, agricultural modernisation, and finish building a modernised economy. It hopes to have in place the modernisation of government and the rule of law for the country, government and society.

The document also espouses that China will aim to promote international cooperation, continue to advance its Belt and Road initiative, and actively participate in the reform of the global economic governance system.

China will no doubt continue to flex its influence in the Asian region – as witnessed by the recently signed Regional Comprehensive Economic Partnership (RCEP), which saw 15 Asia-Pacific nations seal one of the biggest trade deals in history, seeking to reduce barriers in an area covering a third of the world’s population and economic output. RCEP brings Asia a step closer to becoming a coherent trading zone like the EU or North America.

We think that China, and the Asian region more broadly, will continue to offer a dynamic set of investment opportunities:

  1. China will rival the US across a wide range of technology initiatives, from 5G and electric vehicles to Artificial Intelligence and Quantum Computing. Its Achilles heel remains in semiconductor technologies, but the country is likely to pour trillions into this area to reduce its dependence on Western supplies.
  2. China and the Asia region continue to offer an enormous and less-penetrated consumer market that is four to five times as big as the US and has growing wealth in the middle class.
  3. China’s newfound commitment to carbon neutrality by 2060 likely means that the government will also prioritise investment in a lower-emissions infrastructure and new innovations in green and renewable solutions. As one economist writes:

“As the world’s largest polluter, responsible for around 28% of global greenhouse gas emissions, China’s pledge is especially important. The commercial opportunities will not have been lost on China’s policymakers. The country is the world’s largest manufacturer of solar panels, makes more electric vehicles than any other country and is the single largest producer of electric vehicle batteries.” –– Ian Stewart, Chief Economist, Deloitte, November 2020
As a result, we think the opportunity set in China is likely to produce some of the most promising investment stories of the next decade, although as everywhere, it will be very bottom-up and investment specific. You need to focus on managers who invest in quality companies (public or private) that are extremely well governed and have local on-the-ground teams and a “western-style” investment mind-set and experience.

The heavy hand of government remains; but the aim of seeking greater financial stability and curbing monopolistic practices is a long-term positive. The fact that Ant Financial, in essence the largest of shadow lenders, was forced to shore up its balance sheet (it was 50x leveraged) and commit to greater regulation as a bank is long-term good news; that the government is reviewing competitive practices of the larger technology behemoths is also positive. Alibaba today accounts for 75% of online sales and 20% of retail in China.

It seems that the government wants to ensure a fairer, more open and stable economy for business and competition.

Inflation Risk

Central Banks led by the Federal Reserve have made clear their goal to achieve long-term inflation by keeping rates low for the foreseeable future.

“We expect to maintain an accommodative stance of monetary policy until our employment and inflation outcomes are achieved.” –– November 2020.
Social-policy aims are also creeping into the Fed agenda. At his most recent testimony in November, Powell argued:

“We need to incorporate climate change into our thinking about financial regulation. We are in discussions about how we might participate in the Central Banks and Supervisors Network for Greening the Financial System in order to learn from our international colleagues.”
For now, economic forces are still pulling the world towards deflation, but long ends of bond markets will be quick to discount the risk of future inflation if growth moves too far above trend. Yield curves may steepen as global growth begins to pick up and become more sustainable.

Hence, we are reviewing ways to protect clients from the risk of inflation and rising rates with a medium-term view. We think that inflation-protected bonds (where we are able to mitigate duration risk), an allocation to gold (which helps if fiat currencies depreciate too quickly), and real assets (such as quality real estate) remain the combination of choice to protect against future inflation with a medium-term view.


Digitalisation will continue to affect every sector and become an important return driver. The pandemic has permanently reshaped the way we live and work. Some of the behaviours developed during the midst of the crisis – including wide-scale digital adoption – will prove long-lasting well after restrictions on activity are lifted.

Microsoft CEO Satya Nadella says that IT modernisation and “digital transformation” are “becoming key to business resilience” rather than optional. To stay competitive, organisations must respond to these behavioural changes and meet emerging customer demands.

The US and China have been leading the world in the digitisation of the economy long before Covid-19 and we expect this trend to continue. But we also see ample opportunities for digital businesses to take hold in Europe, where internet penetration is high, and the fragmentation of economies makes businesses ripe for disruption.

As one of our managers so aptly put it: entrepreneurship is a borderless endeavour and European technology and new business innovation is supported by a virtuous circle:

“In Europe, we’re emerging out of the first wave of successful European technology companies such as Skype, Criteo, Spotify and Adyen. Success stories like these are what inspire a new entrepreneurial base within a region. Second, Europe has a deep pool of technical talent, even more so than the United States, making it a stronghold for software and technology innovation. And finally, in the venture community there’s a new wellspring of funds helping to capitalise the ecosystem and finance emerging breakout companies across Europe.” –– Bessemer Ventures, November 2020
We believe that many investors still underestimate the creative destruction underway across companies and sectors. Successfully distinguishing companies that embrace digitalisation, both public and private, will be an important source of excess return for investors. Above-average earnings growth will continue to support winners on the right side of the digital trend.


The impact of the virus has refocused attention on protecting the planet. The pandemic has provided us with a taste of what a fully-fledged climate crisis could entail in terms of an exogenous shock to supply and demand, amplified by global transmission.

We are now at a tipping point where governments, companies, regulators and investors are demanding change; support for tangible climate action is happening across the developed world. Investments in climate-resilient infrastructure and the transition to a lower-carbon future will drive ongoing opportunities for companies bringing environmentally friendly and green solutions.

However, the challenge is enormous. Morgan Stanley estimates that reducing energy-related carbon emissions – the largest segment of CO2 emissions – is indeed possible utilising five decarbonisation technologies: renewables, electric vehicles, hydrogen, carbon capture and storage (CCS), and biofuels. Getting there will not be easy:

“Net-zero emissions will require $50trn in investment by 2050 – accelerating the adoption of these technologies could remove 25Gt of carbon emissions annually by 2050.” –– Morgan Stanley, October 2020
Since fossil-fuel power generation – coal, oil and gas – still accounts for approximately 65% of electricity generation, this sector has the most potential for disruption.

The decarbonisation agenda contains both risks and opportunities. Morgan Stanley estimates that between $3trn and $10trn of earnings before interest and taxes might be up for grabs as the world heads to a more carbon-friendly future. This presents a material economic and investment opportunity for those companies and countries on the winning side of investment and innovation in this area.

As a UNPRI signatory, we embrace the call to promote prosperity and protect the natural environment while staying true to our fiduciary duty of optimising and maximising client risk-adjusted returns.

From an investment standpoint, we believe that companies will be held to account to a wider set of values-based parameters, including adherence to Environmental, Social and Governance (ESG) best practices. Companies that rate well on these sustainability metrics will offer better risk-adjusted returns. First, there may be latent risks in companies that do not prioritise sustainability metrics. Second, the market’s perception of good sustainable businesses has grown in importance; we believe that inflows will benefit those companies that prioritise this form of stakeholder capitalism, leading to multiple expansion.

Investment Implications

Powerful economic recovery and an increased government focus on productive investment and job creation could power above-average GDP growth and double-digit increases in 2021 corporate profits.

As we look forward to next year, this remains an equity-positive environment. Longer-term, we need to keep a mindful eye on the evolution of a range of secular forces, which will no doubt impact markets and investments for years to come.

Within equities: We still favour quality companies with strong franchises, capital-light business models, high returns on capital, strong balance sheets and with profit margins that allow for ample release of positive cash flow. We believe that digitalisation winners and companies with strong ESG metrics will remain supported.

We are also embracing opportunities across both public and private markets for rotation into what we call “quality value” over deep value: investments that traditionally trade below growth multiples, and that can benefit from inflection points such as digital transition, positive ESG change, industry consolidation, product extensions and the tailwind of improved cyclical growth.

Rotation will not stop at the style level and will likely take place across geographies as well. Within Asia, China, Korea and Taiwan will continue to outperform given their success in containing the virus and continued dominance in technological trends. We have a positive view and continue to move exposures higher in this area.

Alpha will remain an important driver of total return:

  1. Market rotations can lead to price distortions caused by shorter-term traders and investors.
  2. Concentration risk in indices, such as in leading technology shares, creates buying patterns by passive trackers that may be out of sync with fundamentals.
  3. A world rewarding digitalisation and sustainability will create new winners and losers to come.
  4. Active managers who can reliably add to index returns over the investment cycle can help clients navigate this market volatility and benefit from profound secular changes ahead.

Select hedge fund managers who access returns from the long and short side of the market will be favoured as volatility will become more pervasive across asset classes and currencies.

Real estate will continue to offer real-asset protection, as well as a reliable source of income and inflation protection.

Private equity has the highest forecast returns on our capital market assumptions. There is even greater potential to add additional “incremental return” by giving clients access to top-quartile managers: 12% forecast for the median manager, 15-17%+ for top-quartile buyout, and 18-20%+ for growth equity and venture capital managers (Source: Cambridge).

We see private equity as providing enormous growth optionality and access to powerful secular themes: digitalisation, new technologies, disruption and sustainability. Private equity also serves as a hedge against the disruption of companies that are a high portion of investors’ public market exposure.

Within currencies, most countries are pursuing various forms of debt monetisation and low interest-rate policies. No country really wants to see currency appreciation. The US dollar remains the reserve currency, is the most liquid in the world, and the currency of choice in the lion-share of trade and commodity transactions, which support ongoing dollar stability.

However, the US dollar often weakens when growth in the rest of the world begins to show strength as investor flows move outside of the US. As the recovery takes hold, we will keep a mindful eye on further US dollar weakness and the implications for our positioning.

We are also intrigued by the emergence of digital currencies and the role that they might play in the future functioning of the monetary system.


We are using our multi-temporal framework to guide our thinking:

  1. Winter of discontent: Near-term, we expect more economic softness as the virus rages on in the developed world and lockdowns continue to affect economic activity. New stock-market highs can give rise to bouts of volatility, as good and bad news are juxtaposed.
  2. Spring recovery: 2021 offers the prospect of a powerful economic recovery once virus solutions normalise growth and economies continue to benefit from the tailwind of accommodative monetary and fiscal stimulus. Gains in risk assets in our view will become more broad-based, providing opportunity for more diversified returns across public and private markets.
  3. Secular shifts beyond: Medium-term, a range of secular forces are taking shape that have the potential to fundamentally change the investment horizon; winners and losers will remain an operative theme, creating strong bottom-up opportunities for active management.

We continue to focus on building client portfolios that can navigate through these changes using the full palette of private and public markets and selecting the best of active managers and investments on a global basis, which also have a strong commitment to ESG and a more sustainable future.



Winter of Discontent, Spring Recovery, Secular Shifts Beyond

We have a multi-temporal framework for thinking about the world: winter of discontent, spring recovery and secular shifts beyond.


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