Covid-19: Investment myths, implications for investors and Mr Spock

Our head of investment looks at the global socio-economic differences and which countries are strongest.

-    Britain is at last beginning to show a little bit of its Blitz spirit after a very poor start
-    US response to the virus appears woeful at best
-    China, meanwhile, looks in a great position to restart economic growth 

Rebecca O’Keeffe, Head of Investment, interactive investor, writes.

Covid-19 has offered us a fascinating insight into the socio-economic make-up of different countries around the world.  We in the west were previously somewhat smug in our view that western socio-economic liberties offered a much better template for a civilised and prosperous society than more centrally-planned and occasionally draconian countries such as China, where economic freedom was encouraged, but often at the expense of political and individual freedoms.

UK v US

So what of the West?  Buffeted by so many economic headwinds, UK shares are at multi-year lows.  The Chancellor has so far played a very difficult hand with unexpected composure, and elements of the UK economy have proved surprisingly flexible in readjusting to the new economic reality.  The road ahead may be difficult, but current valuations suggest there is at least a reasonable risk-reward for money invested now in UK plc.

As for the powerhouse that is the US economy?  It is hard to be sure whether the economy can be saved by throwing $2 trillion at it without a more rigorous response to the virus.  But with valuations barely off their medium-term highs, it is more difficult to see whether there is enough risk-reward for your investment there.

Calling Mr Spock

Covid-19 shows how, in Mr Spock’s words, the needs of the many sometimes outweigh the needs of the few, and a regime that is able to impose tight control on one subset of its citizens can succeed in halting the virus where a more libertarian country struggles.  

Even among “similar” countries, the exact make-up of the political system is also important in determining the potential for success or failure in fighting the virus.  Countries with cohesive and nationally co-ordinated policies are likely to do better than those where individual states are more likely to compete than co-operate with each other.

The social contract

But this is only one aspect of the socio-economic mix.  Just as important is the stability of the underlying economy and the social contract between workers and their employers.  Here the divide is largely between countries in which workers have few, if any, employment rights, and those that have security of tenure even in times of crisis such as we now find ourselves in.  

Many Asian as well as European economies such as Germany and France therefore exhibit stability in employment, whereas an economy such as the US, or parts of Europe where a majority of workers are employed in temporary, seasonal jobs, are likely to experience very substantial increases in unemployment.  

What protection those unemployed workers receive will also vary from one country to another. Here again, perceptions about which system is economically superior to another may be challenged in the weeks ahead.

Which countries look strongest?

For investors watching all of this unfold, it is very reasonable to think that some economies are going to come out of this stronger than others.  Having held off any major stimulus until it had first halted the virus, China now looks to be in a great position to restart economic growth, and it would be reasonable to think that countries such as South Korea and Singapore will do well on the way back up too.  

In Europe, it is hard not to be impressed with the German rigour and composed response in the face of the viral onslaught.  There too, stimulus has been held back on countless occasions, but it looks as though a new green agenda could offer a route-map towards state-led economic recovery.

It is not clear that Japan is a success story.  Although case numbers remain very low, Japan’s aging, and largely urban population make it a potentially even more high-risk category and this may mean a more protracted way out of this crisis.

History will be the judge

So as we watch the Johns Hopkins data for signs of success and failure globally, in Asia, China is head and shoulders above the rest in how well it has coped with this crisis, with South Korea and Singapore also holding up well.  

In Europe, Germany has clearly been far more successful than Italy or Spain, and while the UK got off to a very poor start, it is at last beginning to show a little bit of its Blitz spirit.  In the US, which is probably still a week or two behind Europe in its Covid-19 curve, signs are still a little mixed.  While the response to the virus appears woeful at best, saving the economy has been prioritised instead.  

In all of this, history (and investors’ portfolios) will be the judge.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.