White paper: The new economic order

White paper: The new economic order

We believe the Covid-19 crisis will trigger a step-change in policy, accelerate existing trends and transform investment frameworks. Government intervention, fiscal activism, corporate governance and sustainability, and continued Asian economic strength will characterise this new order, creating opportunities out of dislocation.

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History is littered with examples of large-scale crises ushering in new governmental, economic and social structures. In very recent history, the Global Financial Crisis led to an era of low interest rates and growth, and repeated central bank intervention. Now we think the Covid-19 crisis has the potential to spur its own set of changes.

How the crisis unfolds largely depends on the trajectory of the virus, the strategies used to exit from lockdowns, and how policymakers respond. As a result, we see three broad economic scenarios developing. The base case, to which we ascribe a 60 per cent probability, is a U-shaped recovery: this entails social distancing for the rest of the year and lockdown restrictions gradually being lifted throughout the summer. Policymakers will provide further support, both on the monetary and fiscal side, but given the scale of the challenges including falling inflation, high unemployment and a deep recession, this could lead to lasting changes in the economy creating a ‘New Economic Order’.

The New Economic Order will be a world of increased government intervention displacing the free-market policies pursued since the 1980s. Fiscal activism will bear more of the burden and work in conjunction with monetary policy. Corporate governance and sustainability will become widely adopted concepts after proving their worth during the crisis. One area of continuity will be Asia’s enduring role in driving global growth. 

Investors will have to reconcile themselves with an environment of continued low and negative interest rates, debt overhang, unconventional monetary policy tools such as yield curve control, and fiscal spending on a scale we have never seen before. But these challenges create market dislocations that investors can exploit. 

We see emerging opportunities from dislocation from new forms of globalisation including building resilience around supply chains (especially where their importance veers into national security), regional disparities in a return to ‘normal’ after the virus, and differences in demographic profiles. The virus is accelerating the move to online consumption and the best companies are adjusting. Valuation disparities have unlocked rare opportunities to buy quality companies. In fixed income, continued low rates and central bank corporate bond purchase programmes are a boon to risk assets. With ratings in flux, we see attractive opportunities among some fallen angels as well as pitfalls to avoid as the credit cycle plays out.

For investors, our previous macro assumptions must undergo a major update and finding flexible ways to navigate these changes will be crucial to generating robust, risk-adjusted returns over the longer term.

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This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. This material may contain statements that are "forward-looking statements", which are based on certain assumptions of future events.  Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialise or that actual market conditions and/or performance results will not be materially different or worse than those presented. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009.

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