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The ‘Great Pause’ – What is the economy for now?

17 July 2020

Amy Kam discusses what opportunities might lie ahead for proactively ESG responsible investors to shape a sustainable economic model following the ‘Great Pause’.

Following the Great War (1914-1918), there were spikes of growth in the global economy as pent up private capital energetically entered the markets. These gains were reversed in part by the Spanish Flu pandemic. The post-war world economy was then beset with issues which brought about the Great Depression. Back then the response of the US was the adoption of “beggar-thy-neighbour” international trade policies, with one such policy being protectionism. As we take stock following the initial economic shock of the potential first phase of this era’s pandemic (Covid-19), protectionist policies are again being deployed in the current day arena by the US, due to Trump’s “America first” stance. What, then, can we anticipate for the world economy as we emerge from the so-called Great Pause? What can a proactively ESG1 -responsible investor do to help shape our economy?

We can look to the words of Robert Louis Stevenson, the nineteenth century Scottish novelist, for guidance:

“Don’t judge each day by the harvest you reap, but by the seeds that you plant.” 2

There are important factors to consider by way of context for an Asian emerging market (EM) investor in order to explore the question of ‘What is the economy for now?’ The US, ahead of the presidential election in November 2020, is “turbocharging”3 its efforts to re-map the global supply chain. The Trump administration is pushing to remove global supply chains from China – bringing manufacturing back from overseas – while the hawks in Washington are making the case that China’s handling of the pandemic has delivered on all the fears Americans had about doing business with China.

For its part, China is seeking technological independence. The country is attempting to learn lessons from its relatively recent past, when Taiwan and the US surged forward in electronics IP in the 1980s while China busied itself with other matters. This has left China vulnerable and currently dependant on the US, with the policymakers in Beijing now looking at how to manage the inevitability of the two countries’ tech supply chains continuing to decouple.

The markets in Asia, like all others, were briefly in turmoil in March 2020. The coronavirus outbreak, first reported in Wuhan late last year, led to the first leg of the current economic downturn. Further compounding the crisis, the oil price collapsed, and risk assets have come under severe pressure. It was only when central banks acted in the beginning of March that the market found its bottom and began to recover. As things currently stand, policymakers are eager to facilitate a return to normality; however, life in a post Covid-19 world will certainly have changed. Consequently, any short-term approach to finding a solution will need to be at least moderately sustainable in the long term.

From this standpoint it is increasingly important that the UN’s 17 Sustainable Development Goals (SDGs) are included in a coherent, unified global framework. These ambitious goals include a global commitment to end poverty, reduce inequality and address climate change by 2030. As such, we very much welcome the International Capital Market Association’s (ICMA) latest development, with its high level mapping to the SDGs providing a broad frame of reference for issuers, investors and bond market participants to evaluate the financing objectives of a given Green, Social or Sustainability Bond Programme4 .

Considering the economic shock caused by Covid-19 is yet to fully play out, we remain humble with any strong views at this point. That said, we feel Asian fixed income as an asset class occupies a “sweet spot” in the market. With ample support from policymakers and central banks to side-step an immediate liquidity squeeze, for Asian countries to reset and deliver on their growth potential, and to ensure this growth is sustainable, they may need to adopt measures similar to those taken to address climate change. This would involve adhering to the values of sustainability and seizing the opportunity for green investment – such as building bike lanes to decrease the number of buses or cars, smart-housing, and renewable energy. Where does this leave the proactively ESG responsible investor following the Great Pause? Again: post Covid-19, what is the economy for now? Should we be focusing primarily on the protection of lives or on maximising profit for the next year, 10 years or more? Where should the balance lie between the often-competing needs of the older, more established and the young, less established? Will there be a lasting paradigm shift, with much of the world having acted in a way that is good for “us as a community” to combat the coronavirus? There was an almost overnight shift from “I” to “We” in people’s approach – will that shift survive as lockdown measures ease, and what impact will that have on our attitudes towards climate change?


The answers to these pertinent questions may not yet be clear – although I am sure that a sustainable economy is critical for EM. It is also clear to me that Asia has all the ingredients and the full spectrum of resources to make this possible offering a compelling risk / reward proposition.

It is incumbent on the responsible ESG investor not only to look for return but, importantly, to proactively allocate resources to sustainable investments, now more than ever, and to contribute to a sustainable economy in Asia. In our experience, contrary to the received wisdom that bond investors have little impact on issuers’ decision-making, frequent interactions between those investors and issuers do influence behaviour.

“We do not have to take what we are given, we shape what we get. That’s responsible investing.” 5

Not all is rosy in the ESG bond garden, however. We acknowledge there are dissenting voices on this point, with some studies articulating that the “E” and the “S” do not get paid. This view expresses that the E&S hold no excess return for bond holders, probably due to the mismatch of investment horizon (bond maturity versus project horizon). It is a long-term play, where sustainability considerations will drive a secular trend to provide long-term outperformance for investors, and cheaper funding for ‘green’ companies. We remain hopeful that there are sufficient end investors with long-term investment horizons. This is a constant challenge facing ESG themed funds.

Another observation stems from increasing social bond issuance post the Covid-19 outbreak, especially from more advanced economies. There is a painful irony, in our view, that countries with a significant percentage of population below the poverty line, and some 70% of the workforce in day rate / vulnerable segments of employment, need social bonds to help them overcome their challenges, but are being crowded out of the current market. “Social bonds” is a more recent and less established pillar in the ESG umbrella. Again, we feel there is a need for recognition and agreement on a unified framework.

On a broader front, the Asian hard currency credit asset class has many attractive traits from a portfolio construction point of view. These are its size, liquidity, average investment grade rating, low correlation with oil & commodity prices, and a full spectrum of economies from AAA-rated Singapore to B-rated Pakistan. That said, the region also has some specific and allied challenges, such as:

  • The need for energy security
  • The need for infrastructure
  • Large population of low to middle incomes
  • Governance – perception of potential issues with reporting and use of funds

Notwithstanding these challenges I see great opportunity in the region. In all likelihood, the only way out of even more debt after the battle with Covid-19 ends is through growth. Asia stands the best chance, in our view, as it is the engine of growth for the world. With demonstrated relatively low volatility, it stands to claim the spot as the best risk adjusted returns. In tandem with this, there is a huge space for positive climate change impact. ESG themed investing should be the only game in town for a sustainable future, because climate change is no longer a tail risk.


Covid-19 has provoked profound questions on the purpose of the economy, as increasing state intervention encourages debate on capital allocation efficiency, moral hazard, and political and geopolitical risks. Social distancing, national lockdowns and working from home have all changed our daily lifestyles and challenged the type of economic model we may want in our future. This state intervention to address the Covid-19 pandemic has great parallels with what is needed to halt climate change: both require global co-ordination to combat, both have seen a degree of conflict in views between generations and both require short-term measures undertaken but underpinned by long-term objectives. In the case of Covid-19, governments are attempting to enforce policies that can shape the future and dramatically change the parameters on which companies build their business models. We remain hopeful that this can be applied hand in hand with promoting ESG and fighting climate change at global, regional, country, company, and individual level.

Indeed, the UN is urging that the recovery should take the form of a “green recovery” and that we will “build back better”6 by putting an end to the degradation of the planet and reducing inequalities. The UN warns that in “an attempt to return to business as usual, [...] the bill will be paid many times over”.

We all make up the market and, to borrow from Robert Louis Stevenson, I urge us all as individuals and investors to judge ourselves not on the short-term gains of a harvest today – but rather on the seeds we sow for a sustainable future.

1Environmental, Social and Governance
2Robert Louis Stevenson
3Reuters: Keith Krach, undersecretary for Economic Growth, Energy and the Environment at the State Department.
5Amy Kam


Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice