Social distancing reduces the rate of growth of Covid-19 infections and reduces the loss of life from over-burdened healthcare systems. However, the side-effect of a sudden stop in the economy leads to loss of income, erosion of wealth, an increase in insecurity and poverty, and a rise in deaths from starvation.
Compared to poorer economies with generally lower fiscal buffers, richer economies can offset some of the economic impact using fiscal buffers (tax cuts, subsidy increases), monetary policy (rate cuts, quantitative easing, direct support for financial markets), and regulation (lower banking reserve requirements, delayed recognition for non-performing loans), without destroying policy credibility and sparking capital flight.
And among the richer countries, the US has the exceptional characteristic that, as the global reserve currency of choice, its currency is regarded as a safe haven in times of crisis and its cost of capital is structurally lower than all others.
Who wants to be a leader in the time of Covid-19?
Is a Hobbesian Hobson’s choice for policy-makers fast approaching, particularly, in poorer countries: A choice between death by Covid-19 or by starvation? The tension to roll back social distancing policy is evident in the public political discourse across all countries where such discourse is allowed, whether developed ones like the US and the UK, large emerging ones like Brazil and India, small emerging and frontier ones like Sri Lanka.
Competent authoritarian governments may find this question easier to answer, particularly if those governments have significant financial buffers to draw on, have mass populations accustomed to severe economic hardship or retain total control of the security apparatus. China, Iran, Russia, Saudi, Tanzania, Thailand, or Zimbabwe, for example, might fit into one of these categories. Opportunistic political leaders seeking to establish a more authoritarian regime may exploit this dilemma, eg in Brazil, Hungary, Poland, or Sri Lanka. But for politically legitimate governments, not led by authoritarian-leaning politicians, this question will be much tougher.
Consider the example of Pakistan. The government has political legitimacy: an elected Parliamentary majority with a charismatic leader and a sufficiently supportive deep-state of military and intelligence services. It also has technocratic competence: a prime minister, finance ministry and an independent central bank, which has quickly pivoted from IMF-ingrained orthodoxy (of fiscal deficit cuts, inflation control, rebuilding FX reserves, allowing some FX rate flexibility) to drastically loosening fiscal, monetary and regulatory policies, at the same time as maintaining open communication and constructive relations with the IMF, commercial and bilateral lenders. The government has been open in its messaging to the domestic population on the Covid-19 versus starvation choice and the need for further international economic assistance. For all its shortcomings in social justice, democratic imperfection, and historic economic mismanagement, Pakistan’s attempts to navigate all the complexity of this dilemma has been impressive (for example, it did not, like South Africa, wait a month after its lock-down to launch its fiscal response or, like Brazil, see its leader belittle Covid-19 and attend an anti-lock-down rally even when close to 40,000 cases had been confirmed).
Much higher urban population density, which means that social distancing may not work as a Covid-19 response anyway, and younger populations, which means that overall fatality rates from Covid-19 should be lower, may increasingly force the hand of the likes of PM Imran Khan in Pakistan to choose the lesser evil: fewer deaths from Covid-19 than from starvation. If he rolls back social distancing, will financial assets rally in the face of higher reported Covid-19 deaths?
But you're already an investor...
Individuals, societies, nation states, and the human race make these decisions all the time. Inequality, in all its forms (income, wealth, opportunities, freedoms, rights, or, even, the basic necessities for survival) would not otherwise exist. It is just that in many respects these choices and their consequences are glossed over, put out of sight, or were made so long ago that they have been forgotten altogether. Covid-19 is bringing this sort of choice to the fore in a way that climate change has not. For significant parts of the population in poorer countries, this is literally about life and death. For investors in these countries it could as quickly become one of enormous financial losses (the economic sudden stop from social distancing will destroy businesses) or gains (a return to a more normal economic environment will mean that current valuations are extraordinarily attractive).
The majority of institutional investors, in my experience, never honestly confess to the moral decisions implicit in their investment decisions: some have a penchant for Consumer stocks and are comfortable with the deleterious effects on society from suppliers of beer, liquor, junk food, and tobacco; some claim to be “Shariah” compliant but will gloss over what look, feel and smell like interest-bearing instruments; some will declare themselves as champions of human rights but enthusiastically invest in authoritarian countries; and some will operate under the 'woke' marketing banner of socially-responsible, sustainable, investing while effectively green-washing many of the inextricable links of their investments with the non-“ESG” economy.
For investors in the poorer emerging and frontier markets, a moment is approaching when they will have to make another one of these implicit moral decisions. Thus far, that decision has been put off by initial denial that Covid-19 was not going to be such a global problem, by hopes that social distancing will be a successful response or that international assistance will be forthcoming quickly enough to offset the economic sudden-stop, or by the reality that the most vulnerable part of the population (the elderly) is also the one that is best represented in the corridors of power. We are likely approaching the end of that phase of this crisis.
And what happens after starvation is prioritised over Covid-19?
Lastly, after taking that implicit moral decision, investors will then have to grapple with the risk that while the wheels of the domestic economy will start turning again, the international community may increasingly treat those countries, which do not prioritise Covid-19, as a pariah in terms of limiting the travel of individuals, for leisure or business, in and out of those countries.