Patience required on the path to recovery


The growing confidence that 2021 will be much better than the year we have just endured is probably correct. That these positive emotions are stirred over Christmas and new year is right and proper – as feelings of optimism and renewal are central themes in our winter celebrations. There is also real evidence to support these hopes of a brighter 12 months ahead.

Science has delivered a selection of vaccines against Covid-19 that are already being rolled out. Asian nations that were first engulfed by the virus are also recovering well. There are logistical challenges to overcome, but the tools to end the pandemic appear to be slotting into place.

However, the path to recovery will not be easy. Decision making by central bankers and politicians in 2021 are arguably more significant than they were in 2020 because they are so finely balanced. There is plenty of scope for missteps ahead to temper any unbridled optimism.

There will be a spectacular recovery in corporate revenues and profits in the second quarter, as the comparable 2020 period was during the peak of global lockdown. Many companies will also return to the dividend list.

These upbeat prospects have already been reflected in markets, with the MSCI World Index, which tracks a basket of developed-market equities, hitting a new all-time high this month.

However, alongside the corporate recovery, the true cost of the pandemic will start to reveal itself. This is likely to temper any exuberance caused by rebounding corporate profitability.

Many businesses – including property companies and oil and gas operations – will be forced to slash the book value of their assets because they are no longer worth what they paid for them.

Some businesses will also discover that their markets have permanently shrunk. Many businesses may therefore find it difficult to survive, as online rivals make their business models defunct. The pandemic may also result in people changing their behaviour by, for example, avoiding large crowds.

Pressure to withdraw economically crippling social-distancing rules will intensify – and the expensive financial scaffolding that has buttressed companies, markets and employment will start to be dismantled. As these supporting structures are removed, we will get a clearer understanding of the permanent scarring the pandemic has inflicted.

So, central bank policy and government fiscal responses will become a challenging balancing act against an unpredictable news backdrop. Those individuals making fiscal and monetary policy decisions will be faced with many difficult and contradictory choices about the quantum and rate of any change in policy. In such circumstances, mistakes can easily be made.

View Full Article – published by Charles Stanley on 31st December 2020