Fidelity International believes the Covid-19 crisis will trigger a step-change in policy, accelerate existing trends and transform investment frameworks. Government intervention, fiscal activism, corporate governance and sustainability, and continued Asian economic strength will characterise this new order, creating opportunities out of dislocation.

(June 5): History is littered with examples of large-scale crises ushering in new governmental, economic and social structures. The Global Financial Crisis (GFC) led to an era of low interest rates and growth and repeated central bank intervention. Now, we think the Covid-19 pandemic has the potential to spur its own set of changes.

But how this crisis unfolds largely depends on the trajectory of the virus, the strategies used to exit lockdowns and how policymakers respond. We see three broad economic scenarios developing. The base case, to which we ascribe a 60% probability, is a U-shaped recovery: This entails social distancing for the rest of the year and lockdown restrictions gradually being lifted throughout the summer. Policymakers will provide further support, both on the monetary and fiscal side, but given the scale of the challenges including falling inflation, high unemployment and a deep recession, this could lead to lasting changes in the economy creating a “New Economic Order”, a world of increased government intervention displacing the free-market policies pursued since the 1980s. Fiscal activism will bear more of the burden and work in conjunction with monetary policy. One area of continuity will be Asia’s enduring role in driving global growth. Investors will have to reconcile themselves to an environment of continued low and negative interest rates, debt overhang, unconventional monetary policy tools such as yield curve control and fiscal spending on a scale we have never seen before. But these challenges create market dislocations that investors can exploit.

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