It’s The Omicronomy, Stupid: Four Ways The Global Recovery Might Now Shake Out

It’s The Omicronomy, Stupid: Four Ways The Global Recovery Might Now Shake Out
Carl Hazeley

about 2 years ago5 mins

  • In a rapid savings drawdown scenario, global and value stocks should perform well.

  • If we return to pre-pandemic normality, you’d likely do well to buy global stocks.

  • If the government removes support too quickly, a smart bet might be to own stocks in defensive sectors that should outperform the market.

  • In an inflation breakout scenario, your best bet might be to focus on value stocks, real estate, TIPS, commodities, gold, and bitcoin.

In a rapid savings drawdown scenario, global and value stocks should perform well.

If we return to pre-pandemic normality, you’d likely do well to buy global stocks.

If the government removes support too quickly, a smart bet might be to own stocks in defensive sectors that should outperform the market.

In an inflation breakout scenario, your best bet might be to focus on value stocks, real estate, TIPS, commodities, gold, and bitcoin.

As if everything weren’t uncertain enough already, the appearance of Omicron has now made the next couple of years even more difficult to predict. But investment manager abrdn thinks we have one of four likely scenarios ahead of us, so let’s look at how to tell which one is playing out, and how you might want to invest if you see them coming.

Scenario 1: Everyone spends, spends, spends

Throughout the course of the pandemic, there’s been a big increase in household savings across most of the major economies. In abrdn’s scenario, this could lead to a rapid savings rundown in which consumers and companies spend their cash to drive a demand-boosting boom.

Excess savings are substantial and are used to supercharge the recovery.
Excess savings are substantial and are used to supercharge the recovery.

That higher consumption would drive up economic growth, but would also contribute to higher-than-expected inflation going forward. abrdn is forecasting that the global economy will be 2% bigger than its current baseline forecast and inflation will be 1% higher.

This scenario is all the more likely if every major economy and industry is fully reopened by the end of 2021, if consumer confidence rises above its pre-pandemic peak, and if that rising confidence is followed by stronger retail sales growth.

What should you buy in this scenario?

Owning global stocks via, for example, the iShares MSCI World ETF would allow you to profit from spending-driven economic growth, and the value-focused Vanguard Value ETF could help offset inflationary pressures.

Scenario 2: Things (pretty much) go back to normal

This scenario assumes that governments step in with policies that reduce long-term negative effects on workers and that current supply chain constraints ease up entirely, meaning there’s little to no long-term damage to the global economy. Digital investment brought forward during the pandemic accelerates some economies’ commercialization and productivity, and the increased supply of goods in others keeps inflation at a manageable level, even as interest rates rise. abrdn sees this scenario delivering 2% higher economic growth versus its current baseline forecast, and 1% lower inflation.

There are a few key ways to tell this scenario is playing out: a quick bounceback in the US labor market, a temporary spike in unemployment in countries that have ended their support schemes (like the UK), and government spending initiatives that are focused on growth-enhancing investment. Keep an eye on supply chain bottlenecks too: they’d fade quickly in 2022 according to this scenario, taking high inflation with them.

What should you buy in this scenario?

The iShares MSCI World ETF could, again, be a good way to benefit from broad-based growth and low inflation.

Scenario 3: The post-global financial crisis redo

This scenario mirrors what happened after the global financial crisis: demand comes in weaker than hoped as governments and central banks try to get back to normal too quickly.

With governments removing their pandemic support and central banks unwilling to make up the shortfall, economic growth would take a hit and stubbornly high inflation would recede. That’d be because consumers – unconvinced by the economic recovery – would use their pandemic savings to pay down debt and save for a rainy day.

Companies would respond in kind, holding back on their investment spending plans. That’ll be even more pronounced in emerging markets, where the pandemic’s still prevalent and support was already insufficient. abrdn expects this scenario will lead to global economic growth 1.75% lower and inflation 2% lower than its baseline forecast.

So here’s what to look out for: governments around the world will announce spending cuts early next year and central banks will curb their economic support, followed by business and consumer sentiment surveys taking a nosedive. The lack of demand will also knock inflation, which could fall and take commodity prices along with it.

What should you buy in this scenario?

You might do well to own defensive stocks like consumer staples or telecoms, which see pretty stable demand for their goods and services no matter what the economy does. And because people rely on the products they sell, these companies typically have the ability to increase prices year after year, which helps drive earnings growth even if the overall economy’s shrinking.

Defensive investments like the Vanguard Consumer Staples ETF should outperform the wider market in this scenario. And if you buy consumer staples stocks and simultaneously “short” the stock market, you’re betting on the outperformance of staples versus the rest of the market, which means you stand to gain if everything tumbles.

Scenario 4: Stagflation rears its ugly head.

In this scenario, supply disruptions escalate further, and “stagflation” – where inflation is high but economic growth is stagnant – sets in. Current record-high inflation proves much more persistent than expected as economies take longer than hoped to adjust to increased demand. Central banks, meanwhile, take too long to take countermeasures – like increasing interest rates. Compared to abrdn’s base economic forecasts, growth will come in 1% lower and inflation 3% higher.

Persistent bottlenecks pose inflation risks
Persistent bottlenecks pose inflation risks

Keep watch for a resurgence of coronavirus across Asian economies (where the production of key products like microchips is concentrated), along with government policies that continue to disrupt travel. You’ll see it reflected in company updates too, as they point to both supply shortages, as well as higher input and output prices. Central banks will likely continue to stubbornly insist that high inflation is still just temporary too.

What should you buy in this scenario?

As for how to set your portfolio up for a world of higher inflation, value stocks like those in Vanguard Value ETF should perform well (here’s why), as might real estate, treasury inflation-protected securities (TIPS), commodities, gold, and bitcoin. More on those here.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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