As the threat of the Spanish flu receded a hundred years ago, people celebrated by holding large public festivals. What followed for those who survived the spread of the disease was a period of both social and economic euphoria. According to historians, pandemics can be brought to an end either medically or socially. A medical resolution is reached when there is no longer any uncontrolled transmission between individuals and the number of infected people falls sharply. Ending a pandemic socially is a conscious decision that primarily happens in people’s minds, as fears of the illness subside and society learns how to live with it. While it remains unclear whether the COVID-19 pandemic will be sufficiently over for us to throw celebratory parties by the autumn, the time has come to prepare for the post-COVID-19 era.
Inflation expectations as the main driver
Investors are fundamentally uncertain about the path to global economic recovery from the pandemic, and this is reflected in macroeconomic volatility. While several key stock markets are still close to record highs with volatility returning to pre-pandemic lows, equities are oscillating between stocks in “reopened” cyclical sectors (e.g. transport) and growth/technology sectors.
Long-term inflation expectations are the main driver of this process, which begs the question: is this inflation temporary or structural? The main problem is that the major central banks are the primary reason for this incredible rally and are in fact the architects of the inflation problem in pursuing a policy of quantitative easing.
Central banks will keep their policies unchanged in the near future. As a result, the macroeconomic volatility scenario in which markets oscillate between value and growth stocks will likely prevail over the next few quarters. Investors wishing to position themselves for such a scenario are advised to pursue a dual strategy.
On the one hand, investments in the drivers of the post-pandemic rally, namely growth and tech stocks, can be recommended. Investors can benefit from this by choosing well-run blue chips or funds investing in large-cap growth stocks. On the other hand, value stocks combined with cyclical and “inflation-friendly” investments are advisable, together with other sectors “returning to normal”, such as transport, leisure and entertainment.