One year into the pandemic, it seems that the world is coming to terms with its wider implications and consequences. Despite widespread vaccination programme, new virus mutations and accumulating death toll raise many concerns. Economic recoveries will be uneven and divergent across countries and sectors. The International Monetary Fund (IMF) has projected global growth rate of 6.0% in 2021, moderating to 4.4% in 2022. Obsession over inflation, bitcoin zigzag and labour shortage in the developed world are major themes which will shudder market pundits, in the coming months.
Jobs and job-creation are always hot topic for discussions, more obviously, in this pandemic. In developed countries, labour shortages at this juncture, are becoming a growing concern. The US is battering to fill up vacant posts. Stimulus package to the most negatively impacted by the pandemic has disincentives to going back to work. Job seekers are putting off hospitality jobs in particular due to low wages, safety concerns and harassment from customers over Covid safety measures. In contrast to developed countries, emerging economies may face up job losses, due to slowdown in economic activity. This joblessness may provoke devastating social unrest causing many countries to face unprecedented economic and political instability.
Currently, a fair amount of noise is being echoed on the inflation front. Economist are anticipating that as the economy reopens and hopefully picks up, we will see inflation move up through the base effects, a conundrum for central banks. Before the pandemic, investors and policymakers settled into a cyclical mindset that assumed that economies were simply suffering from inefficient aggregate demand. Actually, structural factors viz technological advancements, big data and mobility have ushered in a more generalised breakdown of economic relationships and erosion of pricing power. The fear of the economy overheating is still premature, at this juncture. Typically wage increases lead to high inflation. It seems unlikely that increase in wage will happen quickly given the disruption in the labour market. Nevertheless, inflation is a risk that need to be considered as it will negatively impact some asset classes.
Since start of this year, cryptocurrencies have been some of the most talked assets, with bitcoin competing against its own price, and eventually reaching record highs. These gains were driven by a flurry of announcements, including increased adoption by businesses, institutions, and governments. Then, came the U-turn. All of a sudden, it was discovered that bitcoin mining consumes a flurry of electricity causing environmental damage. Blind followers of bitcoin square off their position causing deep plunge to this new minted asset class. Another reason why bitcoin plunged is that Chinese authorities warned about the dangers of this asset class due to its speculative and volatile nature.
In India, there seems to be a dichotomy. On one side, the Covid situation is failing to abate. Many states are facing the grim reality of the pandemic and are in strict lockdown. On the other hand, stock markets are deaf to the agony of the pandemic. At the time of writing, BSE Sensex is up by more than 4.0%. Rollout of the vaccination programme and progress on monsoon will be critical factors to watch out over the next few months to determine the speed and velocity of demand. Bottom-up risk-reward investment ideas are still available across most sectors of the economy.
We are in an unprecedent economic contours. Markets prefer economies running on a full tank of petrol with the foot press hard on the accelerator. Let’s see how policy makers respond in re anchoring the economy in a sustainable path.
