The government, and much of the country, is making its most concerted effort yet to move on from Covid-19. But we are only now starting to work out what a post-pandemic world will look like from an economic perspective.
In the short term, the focus is on inflation and interest rate hikes. In the US and UK, it’s no longer a question of if or when rates will rise, but rather the extent of the coming increases. The resultant rotation out of growth shares has attracted much attention, and it’s not just the Faang stocks that are hurting. Investors will be feeling the pain even if they have no direct exposure to the US: in the UK, many private investor favourites, in sectors ranging from industrials to pharmaceuticals, have been hit hard.
If you were a UK stock market darling in 2021– think Ashtead, Dechra Pharmaceuticals, Spirax-Sarco and so on – chances are you’re down 20 per cent or more so far this year. The lower reaches of the FTSE 100 have been hit just as hard as their smaller counterparts. Investors have been very happy to pay up for quality shares over the past decade; those trading on elevated price/earnings ratios are now suffering the most.
Of course, we should recognise the words of Benjamin Graham: in the short run, the stock market is a voting machine. These moves grab the eye, but they tell us little about what lies further down the line, either for companies or for the wider economy.
It’s been much the same throughout the pandemic, as sectors rise and fall in tandem on the back of case rates and vaccination news. Those dynamics have been put on the backburner this year, to be replaced with the focus on tighter monetary policy. After two years of dealing with the unknown, you could say the latest events offer a kind of perverse reassurance: the cycle of rising inflation and rising rates, while not particularly welcome, will at least look familiar to many readers. For those hoping to get back to fundamentals some time soon, our cover story on page 22 looks at ways to identify potential turnaround stocks.
Be that as it may, most private investors will acknowledge that this is still not a normal cycle, and that means plenty of idiosyncratic risks. This year, many of those are sociological in nature. As we look ahead to what will hopefully prove a better future, plenty of uncertainties remain. To what extent have societal behaviours changed permanently as a result of the past 24 months? How much of a return to normality is already priced into valuations, and by which sectors? We’ll be examining these issues more closely in the weeks ahead.
As it stands, the past few days have given us a couple of basic pointers. UK purchasing managers’ index figures published earlier this week showed a notable spike in services activity in February, suggesting the pandemic-induced shift towards goods consumption (and away from services) is starting to relapse as the economy reopens.
That feels perfectly logical. The speed and extent of this rebalancing, however, is still up for debate. After all, Bank of England governor Andrew Bailey told MPs in November, pre-Omicron, that the rebalancing of demand from goods back to services wasn't happening as quickly as expected. The scope of the expected economic recovery this year is equally uncertain, given the cost of living squeeze now in train.
The market’s ‘voting machine’ instincts have made assumptions about post-Covid winners, just as they have about the extent of inflationary pressures and interest rate rises. Not all of these assumptions will be correct, and there will always be new problems coming down the tracks to alter investment cases. But after two unprecedented years, we’re gradually getting closer to finding out what a post-Covid world looks like.