Navigating Uncertain Waters: Preparing for a Post-pandemic World

Overview

We are now in the early stages of a downturn that will be more profound, in terms of economic and social magnitude, than the global financial crisis (GFC). Global growth is expected to experience a contraction five times what was felt in 2008.¹ Meanwhile, growth in the US will likely double its 2008 contraction to the downside. Changes in public health strategies are likely to forever alter how business is done and society functions.

The policy response so far has been substantial from both the fiscal and monetary sides. However, already stretched deficits and central bank balance sheets across the developed world will likely present a constraint on stimulus efforts.

Moving forward will be challenging from an epidemiological and economic standpoint. Considering the potential paths ahead, we see a gradual reopening and recovery as the most likely scenario. Pursuant to this view, we see US unemployment spiking to levels unseen since the 1930s, and remaining elevated over the medium term due to delicate business dynamics that will be seriously tested during the lockdown period.

When we reach the other side of the public health crisis, several critical macroeconomic challenges will persist. In addition to elevated public debt levels and vastly expanded central bank balance sheets, the global economy will struggle to gain traction with sluggish demand from developed markets (DMs) and a more cemented move away from globalization. From this, we expect slower growth in global trade, as well as divergent paths among emerging markets, where those with fewer external vulnerabilities and more domestic resilience will lead the pack.

We are, furthermore, likely to emerge from this pandemic more polarized economically and politically, as wealth divides and populist tendencies continue to burgeon. Add to this the nascent inflationary pressures baked into swirling promises of endless money creation, and we end up with the picture of a future with highly uncertain economic outcomes. We may need to wait years, if not perpetually, for a return to normalcy.

In such an environment, with low and negative yielding debt piles growing around the world and shifting correlations between asset classes, we believe traditional investment positioning strategies should be reconsidered. We are shaping our investment approach to this crisis in two distinct phases. In this first phase, where economies reel from the impacts of lockdowns, we see value in traditional perceived safe-haven assets, such as the Japanese yen and the Swiss franc. This will be a period of marked difficulty for emerging markets. However, those economies will not all default, and as the more resilient markets start their road to recovery in the second phase, we believe new investment opportunities will emerge. We are currently preparing for the risks and opportunities that will arise in the post-pandemic world.

This edition of Global Macro Shifts begins with a discussion of the current global economic and policy backdrop. Section 2 discusses options for reopening economies and the likelihood of a gradual recovery from this crisis. Section 3 outlines the key risks the world will face once we emerge from the downturn. Section 4 describes the investment implications in this altered macroeconomic landscape, and Section 5 highlights the environmental, social and governance (ESG) impacts of the pandemic.

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Global Macro Shifts is a research-based briefing on global economies featuring the analysis and views of Dr. Michael Hasenstab and senior members of Templeton Global Macro (TGM). Dr. Hasenstab and his team manage Templeton’s global bond strategies, including unconstrained fixed income, currency and global macro. This economic team, trained at some of the leading universities in the world, integrates global macroeconomic analysis with in-depth country research to help identify long-term imbalances that translate to investment opportunities.