In its report, Where have all the fundamentals gone? Investing post-Covid, The EIU suggests that "the coronavirus (Covid-19) pandemic and geopolitical tensions are disrupting business models and may require radical changes in investment strategies."
The EIU "believes that three key themes are going to be vital for investment performance over the next five years.
Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.
- "No end to monetary stimulus in sight. With major economies unlikely to return to their pre-Covid-19 level of output for years, inflation and rising interest rates are not currently a threat. As a result, asset prices are likely to remain decoupled from economic data for some time, but fundamentals will affect relative performance.
- "Prepare for a backlash. Investors should be braced for political shocks ranging from tax increases to disorderly sovereign defaults. Governments are likely to expect more in return from companies that they have showered with wage subsidies and loan forgiveness. Countries with adaptable economies and high levels of political cohesion will be the safest bets.
- "Prepare for a bipolar world. Covid-19 has raised the stakes in the US-China rivalry, and tensions are likely to continue to rise regardless of who wins the US presidency in November. Countries and multinational companies will face growing pressure to show where their loyalties lie, and investors will need to consider the implications along supply chains. While the new order will also create new opportunities, some countries will be better placed to exploit them than others."
The report importantly notes: "Some sectors and companies have already benefited from the liquidity injection to a much greater extent than others, with equity prices surging in China, but languishing in commodity-exporting emerging markets." The EIU expects "this divergence will
continue" and "countries best-placed to adapt to the disruption of Covid-19 (those with sound economic institutions, low financial risks, and flexible labor markets) will recover relatively quickly."
As for the report's finding that investors should prepare for a backlash, The EIU explains that "[a]fter having provided unprecedented monetary and fiscal support to companies, it is likely that governments, and the public, will have a heightened set of expectations of the contribution that companies make to society. This could take the form of more robust competition policy, requirements for minimum levels of employment or support for apprenticeship schemes, higher taxes or measures to restrict high dividend payouts or executive bonuses." Crucially, "Investors will need to monitor political and policy trends carefully."
And in order to prepare for a bipolar world, I concur that "investors will need to consider the implications along supply chains. While the new order will also create new opportunities, some countries will be better placed to exploit them than others." The report adds:
Supply chain realignments will create new opportunities, but investors will need to consider carefully how they might play out in practice. For instance, Latin America clearly has the opportunity to gain from nearshoring in the coming decade, given some comparative advantages, including its long list of free-trade agreement, proximity to the US market and increasingly competitive wages. However, while some movement is likely (particularly to Mexico), our analysis suggests that many countries in the region will struggle to overcome disadvantages in too many areas: infrastructure, long distances to key markets in Asia and Europe (Chile, for example, could struggle in this area despite its many advantages), and political concerns over predictability, stability and security.
How do you think investors should prepare for investing in a post-covid world?