What effects resulting from the pandemic will persist in the long term, and which ones will be absorbed more quickly? What is the most likely scenario investors will have to face? According to analysts at Capital Group, high inflation, a labor crisis, and a simultaneous and unusual drop in stocks and bonds are the main areas investigated to outline possible developments in the reference scenario:
Post-pandemic opportunities are emerging in various sectors in the stock market (transition to more sustainable energy sources and/or significant industrial changes. The numerous years of insufficient investments in commodities could lead to a new commodity supercycle). Many of the price distortions witnessed in 2020 and 2021 are coming to an end, which does not mean prices cannot fall further. However, there has already been significant price destruction, and many excesses have likely been eliminated from the market. Many of these companies will not survive, but some will emerge from this crisis stronger and more profitable.
According to OECD data, global growth is expected to further slow down in 2023, while inflation should gradually ease. Among the main causes of the pressure on stocks and bonds in 2022 (figure below) are inflation and rising interest rates. If the Fed manages to control consumer prices, the negative correlation between stocks and bonds at the core of effective portfolio diversification should return. Inflation is likely to decrease as the Fed and other central banks continue to raise interest rates and reduce their balance sheets. Monetary and fiscal support will decrease over the next decade as policymakers assess what went wrong: this would be a major shift from what we experienced in the last decade, which was largely defined by government intervention. Limited intervention could lead to more volatile markets than investors are accustomed to.