How crises create value. The creative potential of the COVID-19 crisis.
Economic crises cause sharp drops in economic performance, but over the long term they also offer a great deal of creative potential, leading to innovation and new solutions. The COVID-19 crisis, too, is creating new value in a number of different areas. As a result, many places are seeing an unprecedented economic recovery.
Economic crises offer creative potential
From ancient times, the concept of a crisis has had several different layers of meaning. It has always invoked such concepts as "separation," "decision," "fight" or "struggle." Although these things don't sound very edifying, the perpetual grappling between the good, the bad, and the better also has a certain creative power. Sometimes it takes a crisis to make us replace the status quo with something better.
The COVID-19 crisis is leading to innovation
Examples can also be found in business and politics: Policymakers are unlikely to overcome the budget deficits of the European Monetary Union without the jolt of a real crisis. Here in Switzerland, long-overdue pension reforms would likely have languished indefinitely if not for the urgency of a crisis. From that perspective, the COVID-19 crisis has already created more value than earlier recessions did. This is reflected in the following five areas:
1) Technology: The digitalization of nearly every aspect of our lives and the economy is rapidly moving forward. More than two-thirds of our economic output will likely be digitalized soon. The rise and dominance of technology is among the most important social trends of our time. From an investor's perspective, this is perhaps most apparent when we look at IT investments, which have been increasing for decades as a share of companies' capital investments. Over the past 80 years, that share has grown from 15% to more than 50% of total capital investments. It is likely to continue to increase.
2) Sociology: In certain areas, we are experiencing a renaissance of Stoic values – resilience, courage, patience, and truthfulness are once again in demand.
3) Healthcare policy: At every level, efforts are being made to make the healthcare system more digital and to place more emphasis on prevention. At the same time, these issues are leading to new tensions between patients and the healthcare sector, and between centralism and federalism.
4) Economic policy: We have opened a new chapter in post-war history when it comes to cooperation between accommodative monetary policy and active fiscal policy. It's likely to be a long one.
5) Environmental policy: In many places, commitments to combating climate change are leading to investments in infrastructure and other fiscal-policy initiatives (digitalization, CO2 pricing).
A record-breaking economic recovery after the pandemic
In many places, the pandemic is being followed by a V-shaped recovery, and global economic output has never been greater. The same holds true for industrial production, trade in goods, and digital data exchange. Many investments are trading at record levels – from equities and bonds to real estate, collectors' items, and commodities. At the same time, inflation, unemployment, and the cost of capital are low.
What does the recovery from the COVID-19 crisis mean for investors?
This leads us to the essential question: Will this recovery be sustained, or not? The good news is that it will probably last longer than many naysayers fear. In Switzerland, competition is keeping inflation in check. Capital costs are likely to remain low for some time, and so far investments in real assets, such as equities and real estate are not euphorically overvalued relative to bonds.
There are also downsides, however. Solving climate change remains a distant goal, and the sustainability of the economic recovery tends to be overestimated. Moreover, we are seeing no decline in the disparities between rich and poor, young and old, savers and borrowers. What does this mean for investors? The things that count now are prudence, foresight, and a disciplined investment process that is not rattled by day-to-day events.