Prospects for world economic growth have been overwhelmed by the massive and unprecedented disruption caused by the coronavirus pandemic. However, business activity has now started to pick up as lockdown measures have been relaxed in many countries. The extent of this recovery has varied widely depending on the severity of outbreaks of the virus and the capacity of governments to preserve employment and wages. China was initially hit hard by the pandemic, yet its economy is now expected to grow by 3% over the full year. Latest expectations still envisage a strong rebound in the US economy, but this assessment may prove over-optimistic if rising cases of the disease force a widespread return of social restrictions.
Public sector borrowing is rising dramatically almost everywhere as a result of irresistible political pressure to ‘do what it takes’ to maintain living standards. At this stage, there is no evidence of any inflationary pressures arising from the resulting looseness of monetary and fiscal policies, but any sustained economic revival may well be accompanied by sharp rises in consumer prices.
Governments have directly intervened in an unprecedented way into a wide range of commercial activities. Financial and regulatory support for ‘national champions’ is likely to undermine competition at a time when international trading relationships are already under threat. Against this background, it is alarming that the nature of the UK’s future relationship with Europe remains unresolved. The US presidential election in November also looks set to be particularly divisive.
Stock markets have rallied in recent months, reflecting assumptions that there will be a robust economic rebound in the second half of the year. Depressed interest rates are also supporting asset valuations. Much will depend on the availability of any effective treatment for the virus, but positive trends that already favour some of the fastest growing companies in sectors such as communications, healthcare and technology seem to be accelerating.
It is too early to make a definitive judgement on the shape of the recovery. Unsurprisingly, the reopening of economies has seen rising numbers of coronavirus cases. Given the uncertainty over short-term prospects, it seems likely that the market will remain volatile over coming months. Smaller companies are often sold indiscriminately in times of investor panic, which can lead to overly pessimistic valuations of their growth prospects. This may provide opportunities to invest in companies that have previously seemed unduly expensive. McInroy & Wood has many decades of experience in investing in smaller companies through different business cycles, and continues to believe that the sector offers particularly attractive prospects for the long-term investor.