Author: Lote Steina
Nothing quite stirs things up like a good crisis. While it may seem insensitive to look at the bigger picture instead of individual suffering, we should keep a close eye on the major trends too. After all, while the individual difficulties pass and are overcome, the innovations, new approaches, and setbacks ushered in during a crisis will stay for decades to come.
Let’s take two examples. 1945 – large parts of the world are in ruin after the bloodiest conflict in human history. One could argue that it was the greatest crisis in the last few centuries – a crisis with whose consequences we still live today. Nevertheless, we also live with the innovations and positive developments that arose from it. The foundations of our contemporary political, economic, and financial system were laid. The innovations that came from the war – jet engines, nuclear and rocket technologies – all developed to win the war, have been applied to civilian use. Now we have cheap, accessible, and fast airlines, nuclear energy powered houses and industries, not to mention ambitions to colonize Mars.
For a more recent example, look no further back than 2007. The global financial crisis led to many economies stagnating or collapsing entirely. However, if you look at the world before and after 2007 you see a whole different economy. Large scale digitization of services, government structural reforms, and adoption of cloud computing, mobile payments, and blockchain boosted overall productivity and economic performance immensely.
I think I’ve made my point fairly well. Crises drive innovation and development. It is estimated that the Covid-19 pandemic boosted technological innovation five years ahead. Wealthy countries have lavished their economies with generous economic stimuli, taking on more debt and sparking fears of inflation. Poor countries who don’t have the fiscal firepower of their rich world counterparts are left wanting both in terms of economic recovery and vaccine procurement for their populations.
This is not to say that crises are universally good. Income inequality in the US and the EU has worsened since 2007. Career prospects for millennials who were just entering the job market when the financial crisis hit were so altered that many are unlikely to reach their full potential ever. Scores of young people in southern Europe are still struggling to enter the job market.
So what to look out for in the years ahead. Here are a couple of things to pay attention to (bear in mind that this is hardly a comprehensive list).
I was still a teenager when the financial crisis hit us in Europe, but there is one word I remember being on everyone’s lips – austerity. Tightening our belts and reforming our institutions and economies was the thing to do.
How the tables have turned! The economic contraction of 2020 was met with increased government spending, money printing, borrowing, furlough schemes, and all sorts of other financial goodies to keep consumer spending high, manufacturing going, and the economy as a whole chugging along.
The reason why this is important is that you can also expect significant government involvement in the economy in the years to come. The Next Generation EU intends to spend 750 billion euros over the next few years to make Europe greener, more digital and more resilient. While still mired in political discussions, Joe Biden’s infrastructure plan intends to spend somewhere between 1 and 2 trillion dollars in infrastructure, housing, environment, and innovation among other things. If all of this spending is used appropriately and is accompanied by meaningful reforms, it would be a big step towards a more sustainable and better governed future.
For you, dear reader, keep an eye out for where all of that money is spent. It may be a good idea to diversify your stock portfolio by buying a small share of companies that are likely to reap significant benefits from all this money or the changes it brings (large construction firms, green technology and semiconductor manufacturers and so on).
Remember that global political, economic, and financial order that I mentioned a little while back? Being based on free trade and markets, minimal government interference in business, globalization, and international cooperation it led to immense growth and prosperity across the world. Nevertheless, with protectionist and populist politics on the rise over the last decade, it was already on shaky legs. The Covid pandemic landed another hard blow.
As Ian Bremmer, president and founder of Eurasia Group, has pointed out, deglobalization and nationalism are here to stay. Governments are likely to encourage businesses to localize their operations (rather than outsourcing them) and build more resilient supply chains on a local or regional level. With the US and China sparring more often than not these days and Europe primarily siding with its transatlantic partner, these political disputes are spilling over into the economic realm impacting trade, growth, and development.
Given all this – what to expect? Reshoring may be on the horizon. With more government incentives to businesses, higher manufacturing costs in East Asia, and growing political tensions, more manufacturing jobs could return to Europe and the Americas. Now these will not be all of the jobs that were lost over the last five decades, nor will low-skill manufacturing return. Still businesses involved in high-end manufacturing of products and technologies vital for modern economies and national security will start reshoring more and more of their business activities.
As for trade and global growth – the three largest trade powerhouses – US, EU, and China – are likely to remain at odds with one another at least to some extent for the foreseeable future. This will have negative effects on growth and business expansion, particularly concerning US-China and EU-China cooperation. So regardless of who you are – an individual, a small or medium sized enterprise, a government official, or a big shot CEO or politician – pay close attention to how the big actors (US, EU, China) interact as it will impact you and your wallet no matter what.
A little while back hypermobility was all the rage. Not quite so now as airlines and travel firms were among the hardest hit by the pandemic.
Now it is almost certain that airlines and the travel industry will survive, but the accessibility of the former will be much curtailed. Since airlines make most of their money from business class passengers and since business class travel is unlikely to return to its pre-pandemic level, expect the price tag for all the other flyers to go up significantly. Add to that any possible price increases related to future environmental taxes levied on airlines and cheap, easy, and fast travel becomes an increasingly unlikely prospect. Therefore, if you are planning to invest in an airline or a plane manufacturer, do your research beforehand to know whether they will be around five years from now.
There is another, possibly more damaging hurdle to mobility – different pace of recovery around the world and its implications on labour mobility. The world’s 164 million estimated migrant workers, many of whom travel from poor (i.e. less vaccinated) to rich countries, will be curtailed from doing so to halt the spread of virus. While this will slow economic dynamism in the rich world, it will do most damage to poor countries, depriving them of valuable remittances from their nationals working abroad. Remember, for many countries remittances make up a sizable chunk of their GDP. This will be another obstacle in the way of the emerging world as it tries to climb out of the slump.
Up until now urbanization seemed like the natural state of affairs – people move to cities from small towns or rural areas in search of better employment, schooling, housing, entertainment etc. Of course, we all know about the high housing costs, congestion, and pollution, but all of these never seemed to outweigh the benefits of city life.
Things might be changing now as more people are understanding the benefits of living in a suburb or country, especially if the alternative is being stuck in a small city apartment. Sure – this pandemic will pass, but the new approaches to work and communication may signal the end of megacities and the return of millennials to suburbs.
The potential suburb explosion should be taken into account both by those intending to move (expect rising demand to notch up property prices) and those doing the building. For construction companies to reap most benefit from this increased demand, they have to take into consideration the needs of their millennial client who is generally more environmentally conscious (demanding solar panels, green building practices), more into digital technologies and connectivity (smart houses, internet of things), and interested in a prime location (to benefit from peace and safety while also enjoying nearby city services).
Finally (but just as importantly), as consumers and societies in general are becoming more environmentally and socially responsible this will be represented in the investment world. Environmental, social, and governance criteria are standards that companies are held to by conscious investors interested in sustainability.
ESG is not just a fad – it is increasingly becoming the new standard against which most western companies will be measured in no time. This is not just because societies are demanding better treatment of nature, more socially responsible operations, and better governance from their corporate champions – it is governments too.
So even if you are not that into ESG theoretically, you should add firms that adhere to them to your portfolio for two reasons. First, they are generally better run than your average company (that’s what the G stands for after all). Second, if future government regulation enforces these standards, it’s best to invest in companies that are on the good side of them.