The Ripple Effect

COVID-19 and Multi-Asset Portfolio Construction

17 July 2020

3 min read

Caglasu Altunkopru| Head of Macro Strategy—Multi-Asset Solutions

In addition to its tragic human toll, COVID-19 triggered the sharpest recession in recent history, and efforts to control its spread have transformed the way we work, the way we shop and how we connect with others. We think these changes will last awhile—with implications for asset allocation.

A Big Leap Forward in Technology Adoption

Transactions and interactions quickly migrated to electronic platforms, accelerating existing trends. Digital capabilities like teleconferencing and contactless payments aren’t new, but social distancing jumpstarted the shift. As Microsoft CEO Satya Nadella put it in late April, “We’ve seen two years’ worth of digital transformation in two months.”

Early data suggest this may be an understatement. The share of online retail spending on credit cards has jumped by 11% in the US since COVID-19, more than doubling the 4% cumulative change over the past 3 years. (Display); UK data show a remarkably consistent trend—from a 4.6% gain in share over the last three years to 10.8% this year alone.

COVID-19 Has Accelerated the Shift to Online Retail

Growth in Share of Online Credit Card Spending as Percentage of Total Credit Card Spending (Percent)

Historical analysis do not guarantee future results.
As of May 23, 2020
*Increase in average share of credit card online spending in May 2020 relative to March 2020 for US; month to mid-April relative to January and February 2020 for UK.
Source: BAC, Bloomberg Barclays and AllianceBernstein (AB)

As business and family gatherings moved online, traffic on top videoconferencing platforms increased by 10 times (20 times for Zoom alone). Education and healthcare also saw accelerating online adoption. While telehealth has been a clear winner, healthcare companies are now talking about broader recognition of the value of robotic surgery.

Even as the level of activity normalizes, these behaviors are likely to be at least partly sticky—especially in areas where consumers and businesses find new ways of operating to be more convenient and efficient than the old ways. And the reopening of economies seems to have brought a resurgence in new cases, particularly in the US. If social distancing measures last for a while, changes in consumer, business and government behavior could become further entrenched.

More Routine Jobs May Vanish Permanently

As economies reopen with social distancing requirements to protect workers, overhead labor costs for many firms are rising. The answer for some of these employers, such as those running call centers, may be more automation. The shift could be supported by the rising share of economic activity taking place on digital platforms—and by the drive to secure global supply chains.

The notion of jobs vanishing, never to return, isn’t new. A paper from the National Bureau of Economic Research, Job Polarization and Jobless Recoveries, found that jobless recoveries following recent recessions were caused by permanent losses of routine jobs (Display) such as those in manufacturing and office administration. A declining cost of capital investment relative to labor over the past 30 years has likely been a major driver, and COVID-19 seems to have tilted the scales further toward investment.

Many Routine Jobs May Be Permanently Lost…Again

Six-Month Moving Average Percentage of US Population (Logarithmic Scale)

Historical analysis do not guarantee future results.
Through May 28, 2020
“Routine jobs” are defined by Jaimovich and Sui in Job Polarization and Jobless Recoveries, 2018 as those in “sales and related occupations” and “office and administrative support occupations,” “production occupations,” “transportation and material moving occupations,” “construction and extraction occupations,” and “installation, maintenance, and repair occupations.” They’re expressed as a six-month moving average percentage of the population converted to a logarithmic scale.
Source: Federal Reserve Economic Data, National Bureau of Economic Research and AllianceBernstein (AB)

Uninterrupted, these shifts are likely to accelerate and extend some of the hallmark secular trends of the modern era: increasing returns to scale, skill and capital. This bodes well for the long-term earnings power of large firms and secular growers—as well as equity ownership. But this evolution would also be likely to exacerbate already extreme economic inequality.

The unequal distribution of the COVID-19 burden across the workforce already weighs on society. A slow jobs recovery will likely pressure governments to deliver more support to the unemployed by expanding debt burdens and bolstering policies aimed at redistributing income and wealth. Public policy will remain center stage as governments seek to balance stakeholders’ increasingly conflicted interests.

The Portfolio Perspective: Tactical and Strategic Implications

So, how can multi-asset investors translate these trends into portfolio asset-allocation decisions? We expect rising technology adoption will likely benefit large firms and secular growers, so we favor overweight equity exposure as a way to access improving corporate earnings power.

Within equities, we also think it makes sense to consider an overweight to US equities. Valuations are higher than those of other regions, but the US stock market offers more exposure to technology, which is benefiting from the rapid move to digital behavior in the social distancing era.

Meanwhile, a slow jobs recovery might help keep inflationary forces at bay for some time, allowing central bank policy to remain accommodative. As a result, government bonds can still be effective diversifiers to equity risk…although with much lower expected returns versus history.

The key risk to this view is whether public policy can successfully pursue prolabor, redistributive and/or inflationary policies. COVID-19 has forced the hands of governments and central banks, necessitating a much more stimulus-driven approach. More policy action may be on the way if the recovery proves slow. But will that lead to inflation? It remains to be seen. Japan’s example suggests that there may be more to generating inflation than low interest rates.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Caglasu Altunkopru

Caglasu Altunkopru is Head of Macro Strategy in the Multi-Asset Solutions Group at AB. She was previously a sell-side analyst at AB, covering equity portfolio strategy for six years. Altunkopru joined the firm in 2005, covering the European Household and Personal Care sector, and her team was ranked among the top three in Institutional Investor and Extel surveys. Prior to joining AB, she worked as a management consultant with The Boston Consulting Group, Bain & Co. and McKinsey, serving clients in the consumer goods and financial services sectors. Altunkopru holds a BS in mathematics from the Massachusetts Institute of Technology and an MBA from Harvard Business School. Location: New York

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