Institutional and retail investors adjusting their expectations should factor in that the interest rates will likely stay at current levels until immunity allows economic activity to be restored while inflation should not be a worry for most economies, according to State Street.
At the same time, the asset class, which investors traditionally relied upon to reduce portfolio volatility and diversify risk, would become skewed as gains would be capped and downside would be unlimited in the eventual event of rates moving higher.
Following this, it would become harder for transmitting policy in globally interconnected markets as governments are currently struggling to expand credit, but the reverse would also be true.
“There are many factors that will affect the pace of progress, including global cooperation, the speed at which certification, manufacturing and distribution of pharmaceuticals can take place, as well as public’s confidence and trust in the safety and efficacy of any pharma product. This means not just having a vaccine, but also an immunised global population,” the analysis found.
Also, many monetary authorities remained concerned about preventing deflation as they were with inflation, given muted global economic activity and the difficulty in getting money to consumers and businesses through commercial bank lending.
However, direct payments from fiscal stimulus, while still subject to political debate, would reduce deflationary headwinds, it said.
As far as the global employment was concerned, the expectations were it would recover at some point as crises yielded positive changes in productivity and in many manufacturing – and export driven countries, the trend towards increased output on decreased labour existed for decades.
“Inevitably, as governments and industry repair supply lines and ensure the safety of production, manufacturing and industrial output will increase with fewer employees due to necessity,” the analysis said.
“In Southeast Asia, many countries have seen substantial recovery of manufacturing capability return with a fraction of the jobs returning. This means the recovery in employment and retail spending will be slower than many expect, potentially keeping inflation pressures and rates lower for longer.”