In the name of sustainability: up too fast after lockdown?
Are sustainability and current cross-country economic goals compatible? Weak productivity to date, lack of structural reforms and the simultaneous heavy burden of Covid-19 on the supply and demand side make forecasting difficult.
"And yet" (as Charles Aznavour's famous song "Et pourtant" puts it), individual countries could vote in the name of sustainability, the European Union could push ahead with its integration with renewed vigor, tackle the issues of solidarity and coordination, or dare more federalism. An argument for an upswing: "After nearly twenty years of Europe being mostly concerned with itself, the Franco-German plan could breathe new life into the old Europe in the race for competitiveness and attractiveness," writes Laurent Denize, global co-CIO at ODDO BHF Assset Management. The expert knows, however, that from word to deed it could still be a long way off.
High and persistent unemployment
The optimistic expectations of the markets and the actual economic situation, where the current focus is on containing unemployment, particularly in the USA, continue to drift apart. Unfortunately, there is a risk that the labor market will recover much more slowly than production, as the sectors particularly affected by contact restrictions also employ the most people. In the U.S., leisure and hospitality contributes only 4 percent to growth, but employs 11 percent of the working-age population. U.S. retail trade comes in at 5 and 10 percent, respectively. If both sectors are running at half strength (measured against pre-pandemic levels), output falls by 4.5 percent, but employment by 10.5 percent.
Conversely, sectors that are little affected contribute little to employment but much more to growth: Finance, for example, accounts for only 6 percent of jobs but 19 percent of growth. The IT sector employs 2 percent of the workforce, which generates 5 percent of growth, ODDO's Market Flash states.
Central banks could prevent a depression
If the economy picks up again despite contact restrictions - because politicians or the people themselves want it to - growth could recover without the labor market following suit. In this case, the central banks would have no choice but to continue or even expand their extremely expansionary monetary policy. Is this bad news? Not necessarily, because the increasing inflow of "central bank money" has driven valuations on the financial markets to new highs.
Short-term risks of loss
"In the short term, we see some downside risks for the capital markets. These could include new tensions between China and the US, an escalation in Hong Kong, or a second wave of pandemics triggered by the easing measures. At present, the USA is also experiencing considerable unrest and political turbulence. But all these risks need not stand in the way of a normalization of risk asset markets. In our view, there are four reasons for this," concludes Laurent Denize:
- A large rotation into equities that has not yet taken off
- Rapid and flexible intervention by central banks to address corporate financing problems
- Structural changes in the liquidity and interest rate environment
- The gradual easing of containment measures, which is also expected to lead to an economic recovery.
Against this backdrop, the weighting of risk assets will matter less in the coming months than their selection (sector, style, region).
