It’s quite easy to take a glass-half-empty view of the past two years. After all, we spent much of it locked in our homes working to keep coronavirus at bay.
But for all the black clouds of economic, personal, and professional disruption this caused, the lockdown era did offer one silver lining: many of us were able to save more of our money.
This might not sound too exciting at first glance. But as the global return to normality continues, the release of this pent-up cash back into the economy is creating a major investment opportunity.
Soaring savings rates
All-in-all, the increase in excess savings seen throughout the pandemic has been attributed in the main to three key factors.
First, the closure of non-essential shops, together with travel restrictions, forced people to save part of their earnings because they were unable to spend them as they normally would.
Second, consumers saved as a precaution due to concerns around future employment, a reduction in work hours and the pandemic’s potential length.
And third, in many countries, individuals received a surplus of fiscal support from their government, which some managed to put directly into their savings.
According to data from Moody’s analytics, the cumulative impact of these three factors was very powerful, with global savings increasing by an extra $5.4trn since the start of the pandemic. To put it another way, that’s around 6% of global GDP.
But now, things are changing. Pandemic spending barriers are being eliminated and, unlike previous financial crises, savings are mostly sitting in highly liquid banking deposits rather than assets like property.
Consumers worldwide are now starting to unleash trillions of dollars’ worth of excess savings back into their economies. And in doing so, they are triggering the early stages of a spending boom expected to drive strong economic growth for several years to come.
Changing habits
Clearly, the expected growth in consumer spending is a good opportunity for investors. For example, Moody’s estimated that one-third of global excess savings would be spent in 2021 alone, adding more than 2% to global GDP and an additional 2% in 2022.
Zooming in on the UK, the Bank of England estimates that household consumption will increase by 5.75% in 2021 (when final figures are revealed) and 5.50% in 2022. The deceleration in expected consumption in 2022 is attributed to the adverse effects on real income from the increase in inflation.
However, this slowdown in consumption is less than income growth, which signifies that households are expected to spend a significant portion of their accumulated savings.
The issue for investors, then, is how best to get exposure
We believe that, over the long term, the pandemic will have a lasting impact on many of our spending habits. After all, pandemic-borne trends like streaming, exercising, and working from home are expected to remain firm fixtures of everyday life moving forward.
However, while firms specialising in these areas may continue to beat their pre-pandemic balance sheet performance, it has already become clear that the lockdown strength these sorts of firms enjoyed in their valuations has simply been impossible to maintain in many cases as the economy has reopened.
Should this trend continue, then these companies stand to be further limited as more and more consumer cash flows into alternative areas of the economy.
On the flipside, we expect those sectors that suffered the most during the pandemic to be among the hottest areas of the economy moving forward as we revert back to many of our ‘normal’ behaviours.
Indeed, a tidal wave of pent-up demand has already started to be reflected in the performance of services areas such as airlines, hotels, booking platforms, entertainment companies, healthcare, and fitness firms.
Take the UK restaurant industry as an example. In May 2021, the Office for National Statistics (ONS) reported that bookings were a third higher than pre-pandemic levels in the week after indoor hospitality was allowed to return.
Likewise, despite the fact that the borders of many countries around the world remain closed, data from November 2021 showed flight bookings in the US had reached 70% of pre-pandemic levels within a day of the country’s reopening announcement.
As you’d imagine, stocks in these sectors are benefitting as demand for their services soars. With consumer confidence continuing to return, vaccination rates steadily rising and balance sheets growing stronger, these pockets of the market could continue to thrive.
Multi-year rebound
We believe that central banks in developed markets will look through inflationary pressures, maintaining monetary accommodation that will favour the economic recovery and support a rise in pent-up consumer spending moving forward.
As this trend continues to unfold, we expect the strongest performing areas of the market to be those that were hit heaviest when we our normal spending habits were taken away from us during the pandemic.
Joaquin Thul is an economist at EFG Asset Management. The views expressed above are his own and should not be taken as investment advice.