This week’s anti-lockdown protests in Italy and Spain may be an early warning of the long-term risks of the Covid-19 crisis. I remain sceptical about the idea that our behaviour is going to change as much as some analysts think (see right). But the impact on the economic and political environment in which we live – and the consequences for investors – could be far greater.
At present, many people clearly overestimate the risk that Covid-19 poses to the average healthy adult. This fear, combined with the onerous restrictions on many areas of life, is having a huge impact on their willingness to do things that were once considered a normal part of everyday life. My view is that they will begin to feel safer once vaccines are rolled out. Whether the first ones are very effective or not – and it’s likely they won’t be – the placebo effect of the start of vaccination could quickly change attitudes among people who are tired of being scared. We can’t be sure this is how it will play out – but note that the 1918-1920 flu pandemic was followed by the Roaring Twenties. That’s the bullish scenario for the next few years.
Fear the anger of those left behind
The bear case hinges on a failure to fix the vast economic and social damage being done by authoritarian government policies. An entire generation of people who have left education in the last few years or will do so shortly may have their long-term employment and earnings prospects badly affected. Crucially, that could happen alongside a boom for luckier sections of society – as happened with those who suffered after the global financial crisis and for part of previous generations affected by trends such as deindustrialisation (many of these groups are being hit again by this crisis). This would create fertile ground for populist politicians on both left and right, and it’s impossible to predict where that might lead. I’d only say that we can’t assume that any country that is currently investor-friendly and free-market will always be that way.
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There is no simple answer to these risks, unlike hedging against inflation caused by increased spending. But global diversification is the first step. This didn’t pay in the last decade; you wanted to be invested in America above all else. But when the future is uncertain, spreading your assets widely improves the chance of keeping some if all goes wrong. Back in February I wrote about a GDP-weighted investment portfolio. This would have lagged a market cap-weighted portfolio over ten years, but maybe its time will come again. My own portfolio is even more weighted to Asia – which is so far coping better with Covid-19 – than the region’s share of global GDP would suggest.
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I wish I knew what GDP was, but I’m too embarrassed to ask
Gross domestic product (GDP) is a measure of the size of an economy over a period of time (normally a year). GDP is most often used for discussing individual countries, but may also be calculated for regions (eg, southeast Asia), trading blocs (eg, the European Union), or areas within a country.
GDP is calculated in three ways. The production or output approach is the sum of all the value added through producing goods and providing services (ie, the market value of what’s produced minus the costs of producing it). The income approach is the sum of all the income earned by companies and individuals from offering the same goods and services. The expenditure approach is the sum of everything spent on finished goods and services. In theory, all three should produce exactly the same result, but the difficulties of collecting data means that they may not.
Expenditure is normally the most useful way to analyse what makes up GDP. The equation is GDP (represented by a Y) = consumption (C) + investment (I) + government spending (G) + exports (X) – imports (M). As the last two terms make clear, GDP is based only on what’s produced within the borders of a country. If you’re looking at how much is produced by businesses owned by residents of the country – whether production takes place at home or elsewhere in the world – the equivalent statistic is gross national product (GNP) or gross national income (GNI).
Larger countries can have a bigger GDP than smaller ones and still be poorer in terms of living standards, so we often look at GDP per capita (GDP divided by population). In addition, comparing GDP calculated at market exchange rates – known as nominal GDP – may not reflect differences in the cost of goods and services between countries. So we also look at GDP per capita at purchasing power parity (PPP), which adjusts the exchange rate to account for differences in living costs.
