April 8, 2020 - Though most of us are rightly focused on the health and welfare of our family, friends and communities during this unprecedented situation, many are also concerned about any residual impact on their long-term financial circumstances. As we at Pitcairn pay close attention to rapidly changing market conditions, we also know this pandemic will end. We are working to ensure that our client portfolios are resilient in the current environment and also well-positioned for the next market phase.
As we consider the longer-term effects of the pandemic on companies and markets, we have received many questions from clients. I have organized some of these recent questions into three broad categories: healthcare, emerging market performance, and implications of higher US debt levels. While there are many additional aspects of our current situation that could be addressed, I thought you might find the following comments helpful as we all try to understand how this situation will play out.
Thoughts on Healthcare
As we consider the long-term outlook for healthcare in the US, a number of questions arise. Will this pandemic give rise to a call for a broader network of social services and centralized healthcare? Or, will it reaffirm the private sector’s role due to the quality and speed of its response? Which private companies and sectors might perform well going forward?
Once this crisis is behind us, I think the integrity of the US healthcare system will be seen as a great positive. Over the years, I have heard the valid concern that the US system is too costly and does not serve the poorer members of our society well. However, it was only a few weeks ago that I first heard criticism related to its lack of capacity, capability, and quality. I think these recent critiques are misplaced and that the US healthcare system will rise to this incredible challenge in a big way. We still need to figure out how to lower medical costs as a percentage of GDP and how to better serve the disenfranchised, but I believe the free market system is incredibly powerful and will develop therapies and vaccines more rapidly than is currently thought. Further, I think this crisis will put the healthcare sector at the forefront for investors. I look for healthcare to be a leading sector when we emerge from this crisis. We are currently evaluating a handful of expert managers that specialize in the healthcare segment and are looking for ways to incorporate them into our portfolios.
The Impact of China and India on Emerging Market Performance
The pandemic situations in India and China are likely to play out very differently in terms of both the severity of the disease and the economic implications. Regarding China, I believe only a handful of China’s government officials know the accurate statistics of how many people got sick and how many people died in Wuhan. Based on what we are seeing in other parts of the globe, the numbers are certainly much larger than have been reported. Though China’s high level of social control can be used brutally, it allowed the country to contain the virus more effectively than might be possible in other countries. Now, the bulk of the pandemic, no matter how bad it truly was, is largely behind them. In contrast, India’s low level of social control and incredibly challenged infrastructure (healthcare and otherwise) means the worst is still ahead. Considering how bad conditions are in Milan and New York, I cannot imagine Mumbai is going to easily navigate through this crisis. We are checking with our international managers constantly.
When this is over, I expect the populist/nationalist sentiment that we saw in 2016 to reassert itself in many countries. That will be a negative for China’s export-oriented economy. Naturally, many countries will want to take manufacturing of critical items, such as medical supplies, back within their own borders. Furthermore, whether fairly or unfairly, there is going to be a search for someone to blame, and China will probably face some sort of economic retaliation from several countries, including ours.
This is not to say that India and China will not continue to grow rapidly and offer opportunities to investors. However, I expect the status quo of the last 20 years, particularly in terms of China’s global trade, to change precipitously as a result of the Covid-19 pandemic. India’s immediate future depends on how broadly the virus spreads and how quickly it can be contained. Based on the data I have reviewed to this point, there seems to be a random component to how severely the disease strikes. If India skirts the worst effects of the virus, I would expect GDP growth to resume its prior robust pace relatively quickly.
US Debt Implications
The potential consequences of the debt the US is now taking on will be the subject of much speculation for years to come. Bookstores will be full of opinions on the matter. Any current forecast depends as much on whether the forecaster is an optimist or a pessimist as it does on the grim facts of our monumental debt load. Both the 2009 crisis and this current crisis are deflationary shocks to the global economy. The Federal Reserve’s answer to both was a clear statement to the global marketplace that the US will deliver as much money as necessary to get through the crisis and to reassure global investors that US solvency is beyond question.
Coming into 2010, I was convinced (in keeping with the consensus view) that the Fed’s large level of money printing would lead to some amount of inflation. That inflation never happened. Now, we are engaged in a monetary expansion that makes 2008/2009 pale by comparison. In contrast to that period, current inflation expectations barely budge in response to monetary actions that have historically spurred significant inflation. A good part of the reason for this is that a country’s solvency, liquidity, and fiscal status is, in many ways, a relative rather than an absolute exercise in analysis. To oversimplify, no matter how much money the US prints, if the European Central Bank and the Bank of Japan print more, then global investors will support the dollar and US debt. Theoretically, global investor confidence in the US dollar and the associated willingness to buy Treasury debt should wane at some point, but where is that point? That is the subject of much debate right now. If global investors lose faith in the dollar and the store of liquidity, it would be the first time and that would certainly cause an unprecedented set of negative consequences for our economy.
I don’t think that will happen. It is much more likely that we are foisting a load of debt on our children (as are many other countries) that will curtail future GDP growth for a long time. Our economy’s historic potential to grow at 5% or 6% will be untenable as debt payments and taxes rob from the capital investment that would engender greater growth.
It’s important to recognize that the global economy is still a relative game and the engine of US capitalism is an extremely dynamic one. I believe that engine will remain the driver of US growth that makes our future less scary than we currently think.
Once again, let me express our hope that you and your family remain healthy and safe during this difficult time. We at Pitcairn are working separately but in unison to ensure that your long-term wealth plan remains on course amid the current market uncertainty and through the inevitable recovery. Please contact us if you have any questions.