Prospects for world economic growth have been overwhelmed by the massive and unprecedented disruption caused by the coronavirus pandemic. Business activity, which had started to pick up as lockdown measures were relaxed in many countries, has been hit by a second wave of viral infections. Nevertheless much has changed since the original devastation caused by Covid in the first half of the year. Medical management of the illness is more effective, and extensive measures to support employment have preserved discretionary consumer expenditure, albeit at a considerable future cost to public sector finances. Economies have made considerable strides in adapting to the new environment. Global supply chains have been preserved and industrial production has recovered. Indeed, September’s business sentiment survey in the US reached its highest level for over a year. China’s relative success in suppressing the impact of the virus has resulted in a sustained recovery with growth of 2% forecast for the full year. The announcement of potential vaccines will reinforce confidence and provide hope of a more positive 2021.
Loose monetary policies remain firmly in place across the world, and authorities look set to err on the side of caution before raising interest rates. Indeed the Bank of England may be forced to switch to negative interest rates as it has increasingly less scope for further quantitative easing at a time when it already owns over 40% of outstanding gilts.
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. Against this background, it is alarming that the nature of the UK’s future relationship with Europe remains unresolved. In the US, Joe Biden’s presidential election victory was initially well-received by equity investors. While it is too early to judge how successful his economic policies will be, he is expected to implement a return to more normal international trading relationships.
Looking ahead, much depends on whether renewed outbreaks of the pandemic can be successfully contained. In particular, the efficacy and availability of any vaccine are clearly critical. However, the world now looks far better positioned to cope with the disease. We expect the global economy to regain momentum in the new year, but many equity valuations already discount some recovery. 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.