Paradigm Shift: Looking Beyond The Covid-19 Pandemic [Part 1]
The Covid-19 outbreak that started in the beginning of 2020, has now evolved into a full-blown pandemic. Many countries, including those of developed economies, have gone into nationwide lockdown in bid to contain the transmission of the virus.
The Covid-19 shock has been sharper and deeper than what we saw in 2008’s Global Financial Crisis (“GFC”). But unlike the GFC, the current economic fallout of Covid-19 has been met with much swifter and greater fiscal and monetary response.
Still, some pockets have shown strength and resilience while some thriving amidst what the International Monetary Fund (“IMF”) dubbed as the Great Lockdown. The question now is how should portfolios position for a post-Covid-19 landscape?
If anything Covid-19 has taught us, it is that transboundary challenges like epidemics and environmental disasters will require more globally coordinated responses. However, the power dynamics manifesting between the US and China during this period has suggested that there will be a greater degree of geopolitical competitions among great powers.
Global supply chain, exposed of its vulnerability, will continue to see the decoupling from being disproportionately dependent on China or certain geographies.
Meanwhile, the US is also reeling back from acting as chief of post-liberal international world order. From an economic perspective, the US’ share of global GDP has declined slightly half from almost 40% in 1960 to about 24% in 2018, based on data from the World Bank. Such erosion in power could explain why the US is taking on a more confrontational approach in its foreign policies under the Trump administration.
Source: WorldBank Data; Phillip Capital Management
The forces at play seem to suggest that globalisation will give way to forces of protective nationalism. However, completely turning the clock back to pre-globalisation era is almost impossible. The most plausible scenario would be the rise in regionalisation – greater level of interaction between economies in their regional blocs.
Breaking Down To Regional Blocs
This process of transiting from globalisation to regionalisation will create new opportunities for investors. Before narrowing down to sectoral themes, investors should consider these paradigm shifts when constructing or allocating their portfolios.
1. US – As long as the US Dollar maintains its status as the world’s reserve currency, the US will continue to wield tremendous strategic power and financial clout. In times of crisis, weak sovereigns facing difficulties in paying bills or repaying debts denominated in US Dollars would have to rely on the US, because they simply could not create them.
One positive for the US, arising from pumping trillions of US Dollars into the global financial system, is that it acts as counterweight to China’s Belt and Road Initiative (“BRI”). The US has always argued that China’s BRI is the country’s instrument for debt trap diplomacy. As such, the current crisis could force Emerging Market (“EM”) economies to realign their interest back with the US, upon the take-up of IMF’s emergency funds.
2. China – With an economy less open than the US, China will take advantage of the global slowdown to push its agenda of encouraging domestic consumption. To achieve so, China needs to transform its economy to one of high-value based. The “Made in China 2025” released in 2015, is its strategic blueprint to transform its manufacturing sector to one producing high value goods.
Meanwhile, China will likely seek a greater role as the new and major provider of global public goods. To build its influence, greater transparency and access to its market will help to develop trust but also opens the economy to greater competition. One ground to face intense contention from the US would be its financial market.
3. EU – The European Central Bank (“ECB”) under Christine Largade has adopted a “no-limits” policy to cushion the Covid-19 fallout. Establishing a new EUR750 billion Pandemic Emergency Purchase Program (“PEPP”), the ECB will purchase massive amounts of private and public sector securities to ensure that weaker countries’ costs of borrowing remain low and stable. Individual governments are also allowed to increase emergency spending without regard to limits imposed by the Stability and Growth Pact.
Though the funding came crucial, EU members are potentially adding billions to their individual country debt burdens without a sustainable option in the longer term. If memory serves us well, this threatens to reawaken the deep animosities between EU member states over the imposition of austerity policies on weaker member countries.
4. Southeast Asia – The majority of ASEAN countries would likely become China’s backyard to dissipate its share of low value manufacturing such as textile, garments, footwear and furniture.
Meanwhile, Singapore would continue to remain a key re-export hub with higher mix of high value manufacturing such as pharmaceuticals and electronic products. Multinational companies will likely continue to leverage on Singapore’s logistics capabilities within the region to navigate supply chains in Asia. Supportive ecosystems such as established banking services will also play a pivotal role in securing Singapore’s relevance in the global market.
This is part one of a two-part article. In the second part of the article, we offer some perspective to sectoral themes that are favourable in a post-Covid-19 world.
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