What investors in the post-corona world should be prepared for

Corona and the markets

In the opinion of the Invesco expert, there is much to be said for continued rotation in stocks, corporate loans and countries ending on the have been hit hardest by the pandemic and lockdowns and should benefit most in the early stages of the economic upswing – the reflation phase.

As Das explains, the current situation is determined by two opposing forces: the deflationary effect of a classic pandemic and the inflationary effect of a mobilization comparable to wartime. “We are currently dealing with fiscal and monetary policy support that is unprecedented for peacetime, but it does not come close to the level seen in wartime. At the same time, the economic downturn has been far more severe than in previous pandemics due to larger, tighter lockdowns, ”he notes. Therefore, when the economy reboots, if the lockdown-induced dampened demand coincides with the upswing fueled by the progress in vaccinations and the expansive monetary and fiscal policy, reflation may occur more than deflation or high inflation.

Deflation averted

Loose monetary policy and government transfers and guarantees, which have prevented a complete collapse of the economy, financial markets, employment and corporate activity, would avoid deflation. Given the pent-up demand and enormous monetary and fiscal policy support, the risk of inflation appears much greater. However, the spread of new, potentially resistant virus mutations could prevent the economy from really taking off. Regional lockdowns or a delayed reopening of the economy could continue, especially in particularly affected areas such as tourism, the hospitality industry, the leisure industry or business travel. Against this background, Arnab Das considers reflation to be the most probable scenario, with inflation and deflation risks perhaps being about the same.

“In terms of monetary policy, this means that, as the central banks have signaled, it should in fact remain very accommodative for an extended period of time, even if inflation should rise somewhat or the labor market tightened in the wake of a strong economic recovery “, so that. Past experience shows that deflationary or inflationary shocks could be overcome with the right policy response. This could reduce macroeconomic volatility and create a more stable decision-making environment for companies and private households, which would also improve the financial framework for investments in risky assets.

These are the post-corona expectations

From an investor’s point of view, in view of the reduced risk of deflation and the prospect of higher inflation driven by monetary and fiscal policy, the Invesco expert expects a moderate increase in bond yields and continued outperformance of stocks and other riskier investments or regions in which the economic situation is improving again normalize begins. On the other hand, he expects weaker performance from technology and growth stocks as well as China and the US, which would have benefited from the low yields and lockdowns.

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In Das’s opinion, this environment also speaks in favor of a realignment of portfolio insurance from deflation protection Gold and supposedly safe investments such as long-term government bonds to an inflation hedge through income-oriented assets and investments with shorter maturities. According to Invesco’s global market strategist, such a line-up could pay off if growth picks up and the economy recovers with significant, but not excessive, spikes in inflation and rising bond yields.

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