mallowstreet Insights: Asset managers have shared their views on the economic impact of COVID-19, but what do pension funds think?
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The 1918 flu pandemic cut life expectancy in the US by 12 years. The last major ‘black swan’ event – the Global Financial Crisis – saw a market decline of over 55%, which took over 1,000 days to recuperate. How would the business and macro effects of COVID-19 measure up against history?
The implications remain impossible to pin down amidst a rapidly changing environment. But the mallowstreet COVID-19 Survey, which closed last week, offers a vital glimpse into what pensions professionals make of conflicting opinions and spooky media coverage.
Recession may be triggered by the significant reordering of everyday life
The measures imposed to reduce the spread of the virus – which now include the closure of pubs and restaurants, advice to avoid travelling and stay indoors – could have devastating effects on the economy, say UK pension schemes and their providers. A drop of over six months in real economic activity – a scenario becoming increasingly more likely – is not something that most people have thought through sufficiently.
- Market disruption has already been sharp and severe, so pension schemes believe it would translate into decreased investor appetite and a liquidity crisis. Asset managers may struggle to originate and deploy assets across public and private markets.
- But deflated markets would also lead to reduced company budgets across industries – a vicious circle which may take a while to get out of. With real and prolonged delivery interruptions, company profitability would likely be impacted quite severely.
- Some companies, particularly smaller ones, may not survive this environment, according to pension trustees and their providers. Employers may terminate large numbers of staff, feeding into reduced demand and confidence. Between unemployment and bankruptcies, both companies and individuals may have a hard time servicing their debt.
But the labour market would not only be affected by redundancies and terminations. The mallowstreet community is also concerned about the loss of skills, resources – and life – due to the industry’s aging workforce.
Some have made the grim observation that a spike in mortality amongst the elderly may be good for the economy in the long run, as it can help DB scheme solvency and perhaps offset the hit on growth portfolios.
Comparisons with 2008 reveal fundamental differences – we are sailing uncharted waters
69% in the mallowstreet COVID-19 survey expect the pandemic to be at least as big a concern as the Global Financial Crisis (GFC).
One of the problems in 2008 was the underestimation of how interconnected the world had become. The coronavirus outbreak has reminded us that a global economy can indeed be too fragile. But beyond that, there are not many parallels to be drawn between the GFC and the current environment.
- The GFC was caused by flaws in our financial systems, but the novel coronavirus is a health risk, which makes it more ‘real’. It has a knock-on effect on travel, hospitality, human behaviour, everyday lives and mortality – something that cannot be said about the GFC.
- The GFC decline was progressive, whereas the COVID-19 sell-off has felt like a leap over a cliff to UK trustees, advisers and providers alike.
- The GFC could be contained by aiding a small number of large institutions. It will take radical policy innovation to mend the damage COVID-19 has caused to both large and small companies.
- The impaired financial systems left behind by the GFC mean we do not have any of the same tools to address the current crisis. Inflating our way out might be the only way to repair business, government and household balance sheets.
It might take several years till full recovery
96% believe that the macro effects of COVID will last longer than four months, while 58% say it will take over a year for the economy to be back on track. But if the pandemic is not contained and a vaccine not discovered for another year, a return to normal may be even further away.
The prolonged loss of global production may be felt for years to come. It would take highly innovative policies to restore the small business ecosystem within five years, warn UK pension professionals.
For the UK, current Brexit positioning may further compound and prolong negative effects if global trade slows down – it would be hard to negotiate trade deals in such an environment.
A recovery in economic activity in China seems to be crucial globally – it could put us on a path to a shorter and less severe impact.
My personal postscript
This has been a difficult article to write. The comments shared by the mallowstreet community in the COVID-19 Survey show a mix of sombre acceptance of reality and heartfelt concern for how the pandemic has impacted people so far. It has been particularly emotional to read comments addressing the loss of life. I spare a quiet thought for all of those affected by it.
