Q3 Economic Outlook
September 24, 2020
By Kushal Dagli
The first half of the current year has been a rollercoaster ride, with the economy experiencing a severe downturn, followed by a strong rebound from May onwards. The pandemic-induced panic selloff in the equity and credit markets was reversed by a sharp rebound on the heels of an unprecedented globally coordinated fiscal and monetary policy response. The question on everyone’s mind seems to be: What could possibly come next?
EisnerAmper hosted a webcast September 10, titled “Economic Outlook: What’s Next for the Alternative Investments Industry,” that focused on broad economic analysis in the United States and globally; specifically: How fund managers were dealing with the current COVID-19 situation, an outlook on the investment approach in the alternative investment space, and the Q3 2020 economic outlook.
The webcast had prominent speakers, including a private investment fund formation attorney, a well-known economist from the multinational investment bank, and the head of credit strategy from a leading global asset management firm. The webcast abided by the Chatham House rules where listeners and viewers were free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, was revealed.
Learning from this Pandemic
The pandemic had unprecedented economic effects. The decline in the global economy created some disparities, with some sectors being decimated, while other sectors flourished. During the last two months, few items stood out: the speed for economic support in the U.S. and around the world, with the Central Bank responding extremely aggressively from that start, did help slow down the negative economic effect of the pandemic. In addition, some industries had an acceleration of growth, going through an industrial revolution, with the FDA taking action to accelerate the development of new treatments.
Current Macro-Economic Analysis
There are two competitive views on the current market and the economic environment: v-shaped recovery; or, incomplete recovery. In a v-shaped recovery, the economy is predicted to recover quickly, similar to a natural disaster shock. In an incomplete recovery, the economy is predicted to morph into a recession or prolong into another year with a slow growth rate.
The reason for two different views is because we are in a zone called observational equivalence. A portion of the economy has recovered ; just as we had a record downturn in a first half, we are seeing an uptrend. This is the same story globally as well, second quarter GDP was down and then tracking up. This rebound trend seems to be a v-shape recovery. However, most economists view the current economy state as an incomplete recovery because the economy has not reached the growth rate that was expected before the pandemic. The GDP is below 4% pre-pandemic expectations globally and in the U.S., the GDP is around 5% below expectation. There is still an expectation that it will take a while for the economy to reach to the expected growth level.
Return Expectations Between Private Investments and Public Investments
For the first time in about ten years, private investment returns match those of public investments. The public market is experiencing dislocations relative to fundamentals, broadly speaking, in the global economy, driving better returns in the private market or privately negotiated deals. Most of the investment strategies in the markets are based on the three components: technical, fundamental, and valuations. Currently, the technicals are more overwhelming than fundamentals in the public market. The returns are expected to be superior in the private markets, as more private companies are interested in capital infusion.
Looking at the companies and businesses impacted by COVID-19, GDP contraction or lower growth rate will be impacted by the current pandemic with many of these companies expected to have incomplete recovery. On the contrary, the skill, hard work and historical perspective economics in the private market are giving better results than in the public market. Hence, at present, because the technologies are overwhelming fundamentals, there are better opportunities in private investments.
Actions Fund Managers are Considering
- Rebalancing of the portfolio to have a lower concentration of risk, with the goal to sell the risk into the market rather than retaining it.
- Reallocating the income to more opportunistic products without launching a new fund.
- Reviewing industry-by-industry what the economic recovery will look like. There is no one-size-fits-all; it will depend on the industry as well as on the companies.
- Creativity in raising capital by fund managers and the ability of larger fund managers to leverage technology and use it during the fund raising in order to increase the speed of execution.
- Fund managers have an increased focus on private markets as there are interesting opportunities for good size businesses who have access to the capital and certainty of execution.
- The fund managers are moving towards more defensing approach due to the future uncertainties.
Given the uncertainties of the vaccine and the upcoming elections, there is a lot of uncertainty about what the near future will hold.