The response to the Covid-19 pandemic will impact policy, economics, inflation, and interest rates for some time to come. Exchange traded fund investors can capitalize on these tectonic shifts through a special focus on how infrastructure spending can rally economists and politicians alike.
In the recent webcast, A Deep Dive on the Post Covid Global Economy, Carl Tannenbaum, Executive Vice President/Chief Economist, Northern Trust, noted that Covid-19 case counts have crested but remain elevated. Restrictions have even tightened in some areas of the globe. From a quantitative perspective, the situation is considerably worse than it was last spring at the beginning of the pandemic.
But there is light at the end of the tunnel. While the logistics surrounding inoculation have proven challenging, progress is being made. Medical officials now believe that 80% to 90% coverage is the best target for herd immunity. To put this in perspective, only 5.3% of the U.S., 2.0% of the European Union, and 0.5% of the world is fully vaccinated.
“A successful vaccination program is the best form of economic stimulus,” Tannenbaum said.
Meanwhile, the global economy is chugging along due to copious amounts of policy support. Tannenbaum, warned, however, that pulling support too soon risks long-term economic damage.
Looking ahead, Tannenbaum believes that interest rates around the world will likely be low or negative for a long time, with central banks still purchasing substantial amounts of government debt.
Tannenbaum also warned that money supply growth has been accelerating, which raises concerns about inflation. Inflation risk will only rise after market-based inflation expectations have increased over the past several months. Supply restrictions have lifted oil prices, which exhibit high correlation with inflation expectations. Supply chain disruptions have caused shipping costs to skyrocket as well.
On the other hand, inflation in developed markets has been persistently below its targeted level for most of the past decade – the Federal Reserve has stated that it is willing to allow inflation rise above its 2% target due to the levels of depressed inflation seen since the last financial crisis.
Meanwhile, global equity markets have rallied to new peaks and bond markets have fully recovered from March dislocations. Tannenbaum, though, noted that the central bank largesse may be a contributing risk to financial stability.
Looking at the year ahead, Tannenbaum argued that there are hopes for strong consumption in the middle quarters of 2021 as vaccination percentages will be higher, public health restrictions should be reduced, pent-up demand for travel lifts, excess saving provides the means to satiate the pent-up demand, and the global employment recovery gets a second wind.
As a way to invest in this new normal, Michael Natale, Head of Intermediary Distribution, Northern Trust Asset Management, highlighted their overweight tactical positioning in global listed infrastructure.
For example, infrastructure ETFs like the FlexShares STOXX Global Broad Infrastructure Index Fund (NYSEArca: NFRA) offer investors sound fundamentals and above-average dividend yields, making the asset class appealing in the current market environment. NFRA tries to reflect the performance of the STOXX Global Broad Infrastructure Index, which identifies equities that derive the majority of revenue from infrastructure business, providing exposure to not only infrastructure sectors, but non-traditional ones as well.
Natale argued that global infrastructure has historically exhibited low correlation to global equity markets as compared to other equity-based asset classes, thus offering higher potential for diversification. The sector provides stable cash flows and predictable capital expenditures on asset maintenance, which can lead to income generation through a steady dividend stream. Regulated pricing is often tied to CPI, resulting in long-term inflation hedge characteristics. The industry tends to be defensive in nature, offering the potential for protection in down markets. In addition, listed infrastructure offers several potential benefits over direct ownership and private equity, like no lock-out periods and the liquidity and transparency that comes with trading on public exchanges.
“NFRA can be a complement to private investments. It can be used as a liquid, short-term investment vehicle to equitize cash while waiting for private investment capital calls, or as an overlay to infrastructure allocations to meet liquidity requirements without cash drag,” Natale added.
“NFRA offers access to global listed infrastructure for institution with greater liquidity requirements, or when private investing is not an option.”
Financial advisors who are interested in learning more about the post-Covid economy can watch the webcast here on demand.