Merrill analyserer de langsigtede perspektiver ved indsatsen for at vinde corona-krigen. Det fører til større offentlige underskud og en gæld på krigstidsniveau – for USA. Det kan blive nødvendigt med større offentlig deltagelse i skabelsen af nye jobs og erhverv, ja, til styring af økonomien. Det får betydning for investorerne. Merrill mener, at investorerne skal fokuserer på virksomheder, der satser på innovation og høj kvalitet i balancen, og desuden får sjældne råvarer en voksende betydning.
A “win the war” mentality could lead to more debt and a larger deficit.
During the pandemic, the government’s primary focus has been and will remain the health and safety of the public above all else.
Similar to times of war, the government will worry first about winning (helping to stop the spread of the coronavirus), “whatever it takes” approach, and be willing to deal with the aftermath only after the war is won (coronavirus contained).
That was the case during the World War II when the U.S. ramped up defense spending, and the central bank purchased large amounts of Treasury debt to
keep interest rates capped at low levels across the yield curve.
The consequences of this spending led to a sharp increase in the deficit and debt levels.
Now in the fight to help contain this health crisis, the U.S. has seen greater political acceptance across the aisle on using government spending to support incomes and small businesses. The March 2020 Coronavirus Aid, Relief and Economic Security (CARES) Act was the largest stimulus bill in U.S. history, and additional stimulus continues to be debated.
Depending on how long it takes for the economy to recover from the
pandemic, the focus will remain on spending enough to “win this war” (Exhibit 2).
The 2020 federal budget deficit as of July is already running at $2.8 trillion, a $1.9 trillion increase from this same period in 2019, according to the U.S. Department of the Treasury, and is projected by the Congressional Budget Office to reach $3.3 trillion in 2020, or 16% of GDP.
On the same note, the Fed’s balance sheet has grown by trillions amid the aggressive monetary response and will likely remain elevated based on their
commitment to backstopping the financial markets.
Exhibit 2: U.S. Debt is projected to pass levels only last seen during World War II. Federal Debt Held by the Public as a percent of GDP (%). Source: Congressional Budget Office. Data as of September 2, 2020.
Government intervention in pursuit of self-sufficiency and global leadership
Not only has the crisis placed greater responsibility on the government to address public health, but the pandemic-induced economic shutdowns has shone a light on the need for a greater role of government in supporting business resiliency ahead.
Big national priorities such as 5G deployment, physical infrastructure updates and maintaining technology superiority among others, will need the combined efforts of policy makers and the private sector to help pull through.
As 13 million Americans remain unemployed, according to the Department of Labor, and technology in an accelerated fashion disrupts dinosaur business models, the government may need to refocus funding and incentivize research and development (R&D) to revive industries or to help support the build out of new ones to get people back to work.
The pandemic further highlighted the vulnerabilities facing global supply
chains from over-reliance on certain countries for critical materials. A bigger role played by the government in supporting company reshoring efforts may help to promote capital investment, broader job growth and greater self-sufficiency, which in turn would help to protect intellectual property and maintain global technological dominance.
Citizens may grow more amenable to allowing greater government intervention for broader national priorities, especially if that means producing higher-quality job opportunities and keeping the country competitive globally.
Conclusion
Investor mindset may need to shift in this new world with a potential of a heavierhanded government involvement in deciding economic outcomes.
In prior years, the financial community has been hawkish on bigger governments and their active interventions in various sectors of the economy.
Going forward, investors will need to embrace that crisis times would look for big spending and support by policy makers and that naturally would lead to a deterioration in the debt and deficit levels.
On the other hand, more coordinated and timely policy responses and a greater urgency on delivering national priorities are long-term positives. This stance lays the foundation for eventually getting to a higher level of growth and productivity.
Portfolio strategy should remain geared toward a higher nominal growth world as we approach 2021 and beyond. We believe the bigger beneficiary of this environment should be equities rather than bonds.
Relative valuations for equities are not extended and corporate earnings revisions have started to improve as global economic activity continues to rebound.
U.S. Large-cap equities should be considered by global asset allocators for access to companies with secular growth opportunities, greater innovation
prowess and higher-quality balance sheets.
Precious metals should benefit as well, in our view, given the prevalence of economic uncertainty and negative real interest rates.
