At the height of the Covid-19 pandemic, if a Londoner could pass on the street a citizen of Shanghai, Jakarta, New York or Lagos, they would have had the rare experience that the largest thing happening in each of their lives was probably the same thing.
Indeed, compared to all the other shocks of this decade; a war in Ukraine, huge political instability and epoch-defining technological change, it is still the pandemic that has had the most profound effect.
Its immediate impact and the inflationary shock it produced affected almost every individual and company. The world today, as we enter 2025, is a world that is defined by the shape of its recovery from that pandemic.
Like an optimistic patient the day after an operation, we have thrown our legs over the side of the bed, stood up and only then discovered as our head began to spin and our knees wobbled, that it will be a longer road back to health than we had imagined.
The shock to global economic growth from the pandemic, at around 2.9%, was more than double the 1.4% hit from the Global Financial Crisis. The wave of global inflation that was set off by the world's growing economies re-opening after the pandemic caused a cost-of-living crisis that remains with us to this day.
"The 2020s have been a time of tumult and conflict; characterised by hugely significant global shocks that have reached deep into the daily lives of ordinary people across the world."
For the United Kingdom, our capacity to recover from the crisis has been particularly weak. The pandemic came just four years after Brexit, which re-wired all our global trade relationships overnight and led to massive economic disruption. More than this, decades of under investment has left us with productivity shortfalls that are worse than most of the rich world. As we discuss elsewhere in this publication, the challenge facing the new government to tackle this is profound.
Yet, our particularly challenging vantage point in the UK can cloud our vision and lead us to underestimate just how well the rest of the world is now recovering from this shock. There is no human quality as obvious in the long-term economic data as resilience. Come what may, economies do recover from world wars, pandemics and financial crises.
The year we now head into is one in which recovery can take root across the world, without the heavy burden of rising inflation and with the tailwind of falling interest rates. Even as we acknowledge that any recovery the world mounts must be done whilst shouldering an enormous burden of debt.
The key to this coming economic recovery is the effectiveness of central bankers over the past two years. Despite constant voices of criticism, they held to the basic principle that judicious interest rate rises would ultimately drive down inflation. And the underlying strength of particularly the US economy, as it innovates and accelerates through technology transformation, has enabled them to achieve this goal without causing a recession. This is a rare feat in economic history which will be studied for decades to come.
For this reason, the OECD believes that global growth will rise by 3.2% in 2025, with the richest 20 countries growing slightly faster at 3.3%. Whilst the United States is expected to grow at 1.6% and the UK by just 1.2%, there is evidence that the emerging world, which has been held back by high interest rates and a strong US dollar, can again thrive.
Behind this recovery are a number of self-healing processes following the pandemic. The pandemic had, for example, left a high level of job vacancies across the world and these have fallen steadily. These processes though are not without their challenges. As the labour market cools down and fewer new people find new jobs, this could force central banks and particularly the US Federal Reserve to move faster with interest rate cuts to support households and persuade companies to keep hiring. These processes mean that we anticipate that US economic growth will be weaker in 2025 than 2024. However, we believe these rate cuts will prove effective, and this will ensure that a recession is avoided.
Ultimately, we think that any slowdown in the United States will not prove sufficient to stop the world’s long recovery and that this can support share prices and enable portfolios to continue to deliver robust returns.
We should of course remain mindful of the risks that exist. Chief among them is the turbulence that can be caused by a weakening relationship between the United States and China – the world’s two great superpowers.
The new President offers little respite from this. There is a consensus across US political parties that it is time to be tougher with China and this means that our economic recovery must be conducted without the ‘globalisation bonus’ that has helped the world in past decades. New tariffs and new tension slow global trade, force more manufacturing back to the rich world and therefore create more stubborn inflation for policy makers to tackle.
All these risks must be understood by investors, but in the context of a world that is nonetheless slowly recovering.
The huge movements in growth and inflation that were caused by the pandemic have also led to major dislocations within stock markets. Certain types of companies thrive during periods of weak growth and high inflation, whilst others struggle.
Our investment process, by seeking to understand turning points in the inflationary cycle, can help us steer clear of the points of greatest danger.
During early 2022 this danger was in the stocks with the highest valuations as they failed to account for radical change in the cost of money. The beneficiaries from the wholesale shift in portfolios that followed were energy, materials and consumer staples companies that were seen as being resilient to any downturn in economic activity.
As the cost of money and inflation peaked in 2022 however, it became clear that resilient business models had started to take measures to raise their prices and increase margins once more. These businesses, buoyed by the strength of the US economy, started to accelerate profit growth and saw multiples expand in 2024. Energy and materials companies have seen profits collapse as commodity prices have fallen.
We have been mindful not to have exposure to value sectors during the disinflation in 2023. With the prospects of inflation reaching the targets set by central banks, a strong US economy and valuation support, we took advantage of allocations in smaller company stocks at the start of 2024. This allocation, particularly in the US, has enhanced portfolio returns.
We approach 2025 prepared, with an awareness of the challenges ahead and an optimism that signs of recovery continue to emerge.