COVID-19 Spurs Economic Policy, Investment Trends Acceleration

While some changes induced by the pandemic will fade away, others are here to stay.

The COVID-19 pandemic has accelerated significant changes in existing trends, and while some of these trends may recede as the public health crisis diminishes, others are here to stay, according to a recent report from consulting firm Mercer.

“Nonstop social and technological change has increased at a rate as exciting as it is bewildering,” Deb Clarke, Mercer’s global head of investment research, said in a statement. “And COVID-19 has resulted in an acceleration within that acceleration.”

The report, titled “The Great Acceleration: Themes and Opportunities 2021,” identifies three main premises that Mercer believes will impact investment decisions in 2021 and beyond: “the new world,” “business as unusual,” and “position for transition.”

“The new world” refers to ways in which fiscal institutions are trying new techniques to garner economic stability and continuity, as well as the way in which global allegiances and working relationships are being recast. Mercer said this may have an impact on inflation, risk considerations, and the appeal of opportunistic investment strategies.

According to the report, policy is currently “warping the fabric of the economy,” as authorities experiment with monetary and fiscal stimulus in response to the pandemic. As a result, interest rates have gone from “lower for longer” to “lower for very long,” Mercer said.

“This has come with a price for the privilege of holding government assets, which have changed from a risk-free return to return-free risk,” according to the report. “In these strange, interventionist times, the ‘invisible hand’ has been effectively furloughed as the cost of capital and therefore the value of risk assets are now largely policy driven.”

The report also said that a “huge, unanswered question” is what asset returns look like when the economy becomes so “artificial.”

Mercer said many portfolios could be more resilient if their inflation protection “went from none to some,” and suggests investors consider buying unexpected inflation protection before it gets too expensive.

“Investors who have the governance and implementation capacity to use derivatives could consider investing in a break-even inflation strategy that gives more direct exposure to changes in inflation expectations,” the report said.

Meanwhile, “business as unusual” refers to trends within financial and commercial marketplaces, and within social movements, in which the ways of the world have “changed forever.”

The report noted that investors increasingly care more about where their money is invested, and that the companies they invest in are working toward a sustainable future. Last year saw strong flows into sustainable funds, Mercer said, and those flows have accelerated this year, with a stark contrast in net outflows compared with the rest of the fund market.

“In our view, investing in strategies with high ESG [environmental, social, and governance] ratings is the broadest way to improve portfolio sustainability,” the report said.

Mercer also noted that tech companies “were an invaluable part of the COVID-19 response,” by providing remote working and online shopping from the safety of one’s home. However, the firm said these stocks are priced somewhere between “fair weather” and “perfection,” and while they can provide great potential for further growth, “they come with substantial risk.”

Lastly, “position for transition” is a “call to action” for investors to align their portfolios with a strategy that manages the risks of transitioning to a low-carbon economy and the risks of climate change.

“Investors should not be caught off guard by carbon-heavy portfolios being affected by market, technological, or regulatory changes,” said the report. “This means investors should not wait any longer to act, and should exercise DARP—decarbonization at the right price. “

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