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The Case for Economic Optimism

06 August 2020 Sasfin
Paul Donovan, Chief Economist at UBS Global Wealth Management

Paul Donovan, Chief Economist at UBS Global Wealth Management

Despite Lockdown, 85% of salaries remained unchanged during the last quarter in Europe and the US, meaning saved money will be spent, and stock inventories will be replenished in the third quarter.

The first wave of the global COVID-19 pandemic is sweeping South Africa and, in its wake, comes economic complexity, market uncertainty and increased lockdown anxiety. It’s easy for market and investor to become uneasy as unemployment rises and incomes remain static – not just in South Africa, but in the US and EU as well. However, in spite of limited spend and the understatement of ‘challenging times’, there remains opportunity and optimism.

“The first thing to note is that the quality of economic data at the moment is simply terrible,” says Paul Donovan, Chief Economist at UBS, speaking at a recent Sasfin Wealth event. “Most economic data are (is?) just nonsense right now – guesswork and limited transparency. This is further challenged by the fact that government has deliberately tried to lower the GDP which makes this a very unusual economic cycle. It has been an abrupt process , not a burst bubble or a gradual crisis and the reactions of consumers and companies is likely very different from reactions in the past. The traditional ways of forecasting aren’t going to work here.”

That said, Donovan predicts that the third quarter will see the strongest growth ever on record in Europe and the US, partly due to the weak growth of the second quarter. Around 85% of salaries have remained unchanged during the last quarter, pensions have remained unchanged and the 15% who’ve lost income are either unemployed or not getting employment benefits. However, while spending went down during lockdown, salaries did not, which means that money was saved, as much as 20 to 35% in some cases. People are emerging from lockdown with disposable income and, as Donovan explains, “this is data that is evident in the banking system.”

The forced savings of lockdown will be the fuel behind third-quarter growth and spend. Consumers want to have some fun; they want to purchase items that they could not during the lockdown period. In addition, companies will likely increase their inventory and the goods they’re holding in their warehouses. The obstacles affecting the supply chain – particularly disruption from China’s early shut down in the pandemic – have largely been lifted so organisations will likely be focusing on rebuilding depleted inventory. This rise in spending will provide short-term support to the economy, particularly because companies are likely to invest in slightly more stock as an insurance policy in case there are supply chain problems further down the line.

Sasfin Portfolio Manager, Nicholas Dakin, shares Donovan’s optimism and believes that Sasfin’s global portfolios are well-positioned to benefit from this re-stocking of inventory as economies start to fire-up again. “It’s going to be a bumpy ride, but we continue to manage our global portfolios on a forward-looking basis, identifying those companies that should be successful in the ‘new normal’, Dakin said.

“The good news is that we’re going to see very strong growth, but it won’t necessarily be enough to repair all of the damage done in the first half of this year,” adds Donovan. “Inflation will remain subdued while interest rates and central bank policy will remain accommodating. If we stay in a relatively low inflation environment, which seems very likely, then this will shape the nature of the economic recovery.”

For Donovan, the pandemic has accelerated the structural changes that already existed in the global economy with shorter and simpler supply chains; localised production; increased online sales; more flexible working – all factors that will contribute to a more efficient and productive economy over the long term. Yes, there is pessimism. There always is after any major disruption. But the pandemic has also put the proverbial pedal to the metal when it comes to economic reform, innovation and growth. The optimism may not be immediate, but it lies in a future that’s ready to take advantage of the Fourth Industrial Revolution, the forced change to work style and the shifting sands of approaches to market and economy.

Sasfin’s Innovation Portfolio has benefitted greatly from this, given its exposure to companies constantly re-evaluating their business models to ensure they take advantage of the disruption caused by the pandemic.

David Shapiro, Deputy Chairperson at Sasfin Securities, added, “What's happening is that we are coming back from the dead. It's a major achievement, and as that happens, confidence returns and this is helping markets and all elements of the global economy. However, there is still a lot of unknown out there. Broadly, much depends on whether there is a vaccine or a cure, and don’t forget, we still need that 15% that has been lost, we need those people to go back to restaurants, to the movies, and to Broadway.”

“My view is that reading markets in months and quarters is too short-term. The virus has accelerated the digital economy - what was difficult in the past is now standard - and that means many companies can now advance their technology. So we are looking down the line, we are following those companies – we are buying the disruptors and selling the disrupted,” he concludes.


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