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It’s all about the Fundamentals…Don’t Confuse the Pause Button for a Full Stop

COVID has pushed the pause button on global growth: but it’s a pause, not a full stop. And it’s not the first time either. Lockdowns, travel bans and closed theatres were common currency a hundred years ago as well, as were closed pubs, cancelled Christmases and even a mutton headed US movement against facemasks. But back then it wasn’t COVID, it was Spanish Flu: and back then it was the protective measures themselves (much more than any direct impact of the virus) that caused a sharp decline in economic activity…just like today.

Between 1918 and 1921, when Spanish Flu was at its virulent worst, global GDP fell by 19% annually and manufacturing output slumped by 8% year on year. And since COVID broke earlier this year, GDP in the United Kingdom has fallen by 19.5% with manufacturing output in the United States down by 6.7%. The figures are strikingly similar and offer important clues for the future, especially since after 1921, with the virus in retreat and protective measures easing, the US economy grew by 5% annually, construction went into overdrive and stock markets across the planet soared to an all time high. Of course by the end of the decade the roaring twenties had crashed spectacularly on Wall Street, but that wasn’t because of the virus: that was a bunch of investment bankers in spats who unleashed more economic harm than Spanish Flu ever could.

Thankfully we don’t have bankers like that anymore (not outside the prison system anyway), which means that based on historical data we can expect a significant (and substantially pent up) growth in GDP across international markets as COVID measures are progressively relaxed. Precisely because those measures aren’t a full stop at all…they’re just a pause: storing up and then accelerating growth, like forcing down and releasing a spring: just like equivalent measures a hundred years ago.

And when that bounce back happens (likely in the near term given new vaccines are coming on stream by the week), the economies that come fastest out of the blocks will be those with the strongest fundamentals. Think German economic expansion in the decade after the devastation of the Second World War (compared with the UK’s faltering growth over the same period); and think of the spectacular economic growth in India following the global financial crash of 2008 (rogue bankers again). Over the last decade India has been consistently ranked as the fastest growing large economy on the planet, with the turbulence of the worldwide crisis merely priming it to become an economic powerhouse.

Despite the significant market turbulence left in the wake of the crash, GDP on the subcontinent grew by 8% in 2015, 8.2% in 2016 and 5.2% in 2019: far ahead of every other advanced economy in the world, catapulting India to fifth place in the global GDP league table (overtaking the former mother country for the first time). And think back to that coiled spring again: COVID protective measures might have temporarily borne down on economic growth in India (as they have elsewhere), but the country’s underlying fundamentals are still strong, and likely to emerge stronger still as measures are eased.

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So what exactly are these fundamentals? Well, for a start India has the fastest growing population on the planet (forecast to overtake China and become the biggest in the world within a year): the demographic is increasingly urbanised, increasingly wealthy and increasingly technology hungry, which has fuelled an unprecedented consumer boom on the subcontinent over the last decade…and it hasn’t gone away. India is also an increasingly important technology and distribution hub for international markets, benefitting not only from logistical positioning (a bridge between Asian and Western Markets), but an enhanced technical skill base in markets such as Bangalore and Chennai…and that hasn’t gone away either. Add to that a raft of measures introduced by Prime Minister Modi’s Government to improve transparency and competitiveness across capital and financial markets and it’s hard to imagine the spring being kept down much longer. 

Suchit Punnose is Founder and CEO of Red Ribbon Asset Management,which has been investing in Indian business throughout that explosive decade of growth: “Our success as a company has always been inextricably bound up with India’s emergence as a leading economy on the world stage. Seismic demographic changes on the subcontinent have opened up increased investment opportunities, driven forward in turn by an expansion in capital flows between the United Kingdom and India. I’m sure that’s a trend that will continue in the future.”

So don’t confuse that pause button for a full stop…history has clear pointers for where we’re heading, and for the future it’s all about fundamentals.