US consumers, like these shoppers in Boston, are keen to get out and spend some of their US$2 trillion in savings. Photo / AP
US consumers, like these shoppers in Boston, are keen to get out and spend some of their US$2 trillion in savings. Photo / AP
Opinion
OPINION:
Baseball Hall of Famer Lawrence, "Yogi", Berra famously said "it's tough to make predictions, especially when they are about the future". Successful investors know this better than most. That is why the best in the business devote so much time studying the past.
A deep knowledge of historyallows for a broader range of possibilities to be considered and for lessons to be learned from similar events. It is therefore no wonder that the investment community has devoted so much time of late to researching periods like the Black Plague, Spanish Flu, and the Asian Flu outbreak of 1957.
The parallels between those devastating periods and the current Covid-19 pandemic are many. From waves of infection to the economic impact caused by restricted mobility, a lot can be learnt from these past events.
But as the pandemic evolves, even more timely insights can be gathered, especially from those countries that are leading us out of the crisis. It is here that New Zealand's 2020 experience provides a valuable history lesson.
Household savings and govt support cushioned New Zealand
As we all know, New Zealand experienced a severe but comparatively short series of lockdowns. This brought about several common responses. Economic uncertainty alongside lockdown restrictions initially saw the household savings rate rise as people spent less. Also, government support went into overdrive as the economy quickly hit rock bottom.
But what has made this pandemic-induced downturn so unique is that many households have managed to avert the full brunt of the crisis. Keeping people gainfully employed, alongside rampant house prices, has allowed confidence to recover and households to get back to spending much faster than many expected.
These same factors could supercharge economic activity elsewhere this year Following a huge initial shock to labour markets, unemployment in most major economies is also already well below levels seen during the recovery from the global financial crisis.
As well, much like we've seen here in New Zealand, house prices across most of the developed world are now rising at rates not seen for over a decade.
This suggests that countries just beginning to reopen could very well see a similar strong boost in economic activity this year. But where things could be even rosier for them is on the consumer front.
Take the United States, for example. Households there have amassed a massive US$2 trillion (roughly 10 per cent of gross domestic product) in savings after their much longer restrictions. New Zealand's savings rate, meanwhile, has barely turned positive.
For large, consumer-led economies like the United States, Canada, the United Kingdom and much of Europe, cashed-up consumers itching to get out into the spring weather could really supercharge their recovery.
Let's not get too far ahead of ourselves though
Looking a little further ahead, New Zealand could again provide a valuable playbook for what to expect when other parts of the world return to some form of normality over the next year or so.
It is here that the recent levelling-off in New Zealand's economic momentum provides a dose of reality. Private sector credit growth of just 2.6 per cent is at its lowest rate in almost 10 years, signalling that pent-up consumer demand is fading.
New Zealand's 2020 experience provides a valuable history lesson. Photo / Hayden Woodward
This opens the door for well-known structural economic headwinds to reassert themselves. The most prevalent of those are our high levels of debt and worsening demographics.
Innovation drives economic growth and economic growth drives financial markets
To grow an economy, either the population must increase, or the same population needs to be more productive. With global population growth on a strong downward trajectory, the world must find ways to innovate if we are to improve productivity and avert this eventual fade.
More competition could help. When only the most productive and innovative businesses survive, there is a strong incentive to get better, faster, stronger.
Improving the skills of the workforce through education, re-training and a greater focus on research and development are also areas where greater attention will be essential.
The investment community also needs to be part of the solution
Big decisions surrounding education, public funding plans and competition laws will need to form part of the solution. But the investment community also has an important role to play. Being responsible for where and how client funds are allocated means our decisions have profound societal, environmental and financial ramifications.
Those management teams, businesses and industries that are innovating and growing in a responsible way are often those with the most sustainable competitive advantage. What is more, their long-term growth mindset ensures they view the health, wealth, and happiness of society as the key to their success and profitability.
It is our job as investors to seek out these leaders and businesses and to back them in their endeavours.
In the immortal words of Winston Churchill, let's not let a good crisis go to waste.
- David McLeish is a senior portfolio manager - fixed interest at Fisher Funds.
