Using survey data from the World Economic Forum’s 20th Global Competitiveness Report, this graphic showcases the economic impact of COVID-19 worldwide. This year’s survey was conducted between February and July 2020 and includes responses from 11,866 business executives across 126 economies. As you’ll see, the data was collected with the specific focus of contrasting the pandemic’s effects on developing economies compared to advanced economies.
Top Negative Impacts of COVID-19
By comparing business leaders’ responses in 2020 to their answers over the last three years, some clear trends have emerged. In advanced economies, the top negative economic impact of COVID-19 has been a decline in competition, followed by reduced collaboration between companies and a growing challenge in finding and hiring skilled workers: What’s driving this reduced competition in advanced economies? While negative impacts on advanced economies are centered around market concentration and talent gaps, developing countries have faced different problems this year, like increased crime and governance issues: It’s important to note that in the 2018 and 2019 surveys, organized crime and business costs related to crime and violence were trending downward. Because of this, the World Economic Forum suggests that we consider this year’s increase in these areas as as a temporary COVID-induced setback rather than a long-term issue.
Top Positive Impacts of COVID-19
Despite the struggles brought on by COVID-19, the pandemic has also triggered positive change. In fact, business leaders perceived more positive developments this year than negative ones. In advanced economies, the top positive impacts were government responsiveness to change, followed by internal collaboration within companies: Interestingly, internal collaboration improved while external collaboration got worse. This is likely because companies had to adapt to changing work environments, while also learning how to collaborate with one another through remote working. Internal collaboration didn’t just improve in advanced economies. In fact, developing economies experienced several of the top positive impacts that advanced economies saw as well: While perceptions on official responsiveness to change increased, public trust in politicians decreased slightly. This indicates that, while government responses to COVID-19 may have been received well in developing economies, overall feelings towards political leaders did not waiver.
How Have Countries Stayed Strong During the Pandemic?
While the impacts of COVID-19 varied between advanced and developing economies, business leaders across the board identified some common features that helped countries remain resilient: Will these key features of competitiveness remain effective measures of a strong economy in 2021, or will our benchmarks for success evolve post-pandemic? on Last year, stock and bond returns tumbled after the Federal Reserve hiked interest rates at the fastest speed in 40 years. It was the first time in decades that both asset classes posted negative annual investment returns in tandem. Over four decades, this has happened 2.4% of the time across any 12-month rolling period. To look at how various stock and bond asset allocations have performed over history—and their broader correlations—the above graphic charts their best, worst, and average returns, using data from Vanguard.
How Has Asset Allocation Impacted Returns?
Based on data between 1926 and 2019, the table below looks at the spectrum of market returns of different asset allocations:
We can see that a portfolio made entirely of stocks returned 10.3% on average, the highest across all asset allocations. Of course, this came with wider return variance, hitting an annual low of -43% and a high of 54%.
A traditional 60/40 portfolio—which has lost its luster in recent years as low interest rates have led to lower bond returns—saw an average historical return of 8.8%. As interest rates have climbed in recent years, this may widen its appeal once again as bond returns may rise.
Meanwhile, a 100% bond portfolio averaged 5.3% in annual returns over the period. Bonds typically serve as a hedge against portfolio losses thanks to their typically negative historical correlation to stocks.
A Closer Look at Historical Correlations
To understand how 2022 was an outlier in terms of asset correlations we can look at the graphic below:
The last time stocks and bonds moved together in a negative direction was in 1969. At the time, inflation was accelerating and the Fed was hiking interest rates to cool rising costs. In fact, historically, when inflation surges, stocks and bonds have often moved in similar directions. Underscoring this divergence is real interest rate volatility. When real interest rates are a driving force in the market, as we have seen in the last year, it hurts both stock and bond returns. This is because higher interest rates can reduce the future cash flows of these investments. Adding another layer is the level of risk appetite among investors. When the economic outlook is uncertain and interest rate volatility is high, investors are more likely to take risk off their portfolios and demand higher returns for taking on higher risk. This can push down equity and bond prices. On the other hand, if the economic outlook is positive, investors may be willing to take on more risk, in turn potentially boosting equity prices.
Current Investment Returns in Context
Today, financial markets are seeing sharp swings as the ripple effects of higher interest rates are sinking in. For investors, historical data provides insight on long-term asset allocation trends. Over the last century, cycles of high interest rates have come and gone. Both equity and bond investment returns have been resilient for investors who stay the course.
