The Delta effect: Three-minute macro
The Delta variant of COVID-19 is certainly complicating the outlook for the global economy, and we’re keeping an eye on five ways that those complications may materialize. We also take an ESG lens on the gig economy and discuss the yield situation among emerging-market debt.
Delta affects our economic outlook
While we don’t view the Delta variant of COVID-19 as a game changer, it certainly affects our global economic outlook at the margin. In general, it reduces the odds of upside risks materializing and increases the odds of downside risks materializing. Why?
- Uncertainty rises: We can guess or assume, but we don’t actually know how governments and central banks will choose to act, or how households and businesses will respond—this means wider confidence bands and a greater emphasis on downside tail risks.
- A slower global reopen: Good news: This elongates the cycle by reducing the chance of problematic boom/bust type growth, and it could mean we can worry slightly less about broad global inflation. Bad news: The probability of reaching game-changing post-COVID-19 recession “escape velocity” growth falls while downside risks (or growth accidents) rise.
- Supply chain disruptions: These were always supposed to be temporary, but port closures and diminished activity—particularly in Asia—mean this problem could persist for longer than expected. This implies that pricing power becomes even more relevant now, and that we need to keep an eye out for demand destruction, which would detract from growth, for example, in housing, cars, and large durables.
- Labor force changes: We need to (again) monitor potential school disruptions in September, which we know from experience is disruptive to labor force participation rates. This is particularly important because up until now, the consensus view has been that we’ll see a surge in labor supply around then and that wage growth would as a result remain muted. We need to now factor in a higher probability that this labor surge doesn’t happen.
- Energy prices: The knock-on effect to energy prices doesn’t just matter to oil stocks—they affect everything from currency calls to relative growth expectations, and importantly right now, lower oil prices will likely further suppress market-based expectations of inflation and therefore yields.
Come September, keep an eye on the labor force
U.S. male and female labor force participation rates (%)
Profits rise at the expense of gig workers and wage growth
The COVID-19 pandemic highlighted the vulnerability of a sizable and growing part of the economy—gig workers. According to the Bureau of Labor Statistics, there were 55 million U.S. gig workers in 2017.1 These workers were in most cases the first to be out of work, and many were in some of the hardest-hit industries within the services sector.
Problematically, these workers also struggled to qualify for many unemployment benefits and other pandemic-related emergency benefits, given their job classification. There is internal and external pressure on the Biden administration, along with other members of the G7, to make it harder for companies to classify workers as independent contractors. In many cases, the wages earned in some of these gig jobs are far below minimum wage, and employee benefits are scarce.
It should come as no surprise that as the number of gig workers has increased, so too has the proportion of corporate profits as a percentage of GDP at the expense of wages as a percentage of GDP. Wages have been on a steady decline over the last half century, while corporate profits have increased noticeably. Shareholders have been rewarded with greater earnings and fewer taxes on those earnings, while wage earners have struggled. We view the current dynamic of the gig economy as a component to one of our broader themes regarding the rise of populism and also a critical element to social issues we observe when we analyze the employment picture in the United States with an ESG lens.
Profits are on a long-term uptrend at the expense of wages
U.S. wages and corporate profits as a percentage of GDP (10-year moving average)
EM debt: opportunities abound
We’ve written a lot about permanent scarring from the COVID-19 pandemic. There was a time that a 7% yield (to worst) on emerging-market (EM) USD debt wasn’t that unusual. But with the consistent decrease in yields across the globe, the share of outstanding EM debt yielding at least 7% has halved over the past three years, from 18% to 9%. And while there was virtually no EM USD debt yielding below 2% just two short years ago, that figure is nearly 30% now.
Does that mean EM debt offers a less compelling case for investors searching for yield in a low-income world? Not in our view.
The value proposition for EM debt is so much more than its yield. It can offer diversification benefits, high potential growth, and lower volatility, but due diligence is critical; we maintain that there is a wealth of opportunity in this heterogeneous asset class. We believe Asia remains particularly compelling as global liquidity declines. Our analysis shows that in such an environment, Asian local currency bonds, Asian USD sovereigns, and Asian USD credit outperform peers. Notably, we find Asian investment grade and high yield also outperform U.S. and global peers.
It's getting harder to find a decent yield
USD EM debt, yield ranges over time
Important disclosures
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
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