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The impact of the global pandemic continues to be challenging with its distressing impact on public health and disruptive impacts on politics, economies and markets on display throughout 2021. Many not-for-profits (NFPs) have been at the front line in dealing with both the economic and social impacts of the pandemic and it is during these times of hardship that the call on the resources of NFPs is generally the strongest. Many organisations will be facing operational challenges and constraints that will flow through to their financial positioning. To assist how NFPs approach their financial assets, this article provides JANA’s assessment of the economic and market backdrop and some ideas for how NFPs can financially equip themselves for 2022 and beyond.
In the aftermath of earlier pandemic mitigation strategies which focused on social and economic lockdowns, 2021 saw the development and broader distribution of safe and effective vaccines primarily across the developed world. This allowed governments to ease restrictions and supported economic recoveries which have been strongest in those economies where governments provided the most financial support to businesses and households. One near term challenge for the global economy has been a surge in demand for a broad range of resources and goods, so strong in fact that global supply chains have been unable to keep up. Inflation has begun to rise in some economies. This has created an additional uncertainty for the short to medium term outlook as pressure has increased on central banks to increase interest rates to contain the risk that inflation remains higher than targets for a prolonged period of time.
The emergence of the Omicron variant of COVID in late 2021 provided another disruptive twist. So far Omicron has a relatively mild impact on economic activity but has added pressure on global supply chains, labour force supply and goods prices.
Climate change and the global policy response is exerting a bigger influence on economies and markets. Despite the challenges of COVID, global leaders still came together in Glasgow as part of the United Nations Framework Convention on Climate Change (“COP26”) and delivered a compromised “deal” with commitments and ambitions designed to mitigate climate change through developing carbon markets, ending deforestation and reducing fossil fuel emissions by 2030. Despite the positive momentum, there is still a gap between the current announcements and the requirements to limit global warming to 1.5° by 2050.
Against this economic backdrop, the pricing of many risky assets continued to rebound strongly throughout the majority of 2021, supported by the strong economic and corporate earnings rebound and the optimism engendered by rising COVID-19 vaccination rates. Market volatility has however picked up in recent months as concerns around supply disruptions, ongoing inflation fears and growing uncertainty about the path of interest rates have taken hold.
Despite the near-term economic risks presented by the Omicron variant of COVID, the market consensus outlook is that global economic growth is expected to remain above pre COVID trend levels in 2022, albeit accompanied by higher inflation. This consensus view remains supported by extremely stimulatory policy and rising global vaccination rates. The growth trajectory is expected to be uneven across regions and sectors, reflecting the differing experiences with the level of policy support and as well as vaccine availability and distribution.
Risks to the economic outlook remain including the unpredictable path of COVID and the risks of new variants, the potential for policy missteps by governments and/or central banks and ever-present geopolitical risks in both Europe and Asia. These risk factors are unique in nature and will have differing impacts across geographies, asset classes and sectors.
As highlighted above, the base case environment is relatively uncertain with the potential for a range of economic outcomes. A symptom of the pandemic and its unpredictable nature has been information overload and, whilst the start of 2022 may feel similar to the volatile events of 2020 and 2021, JANA encourages not-for-profits to take a few simple steps with regard to their financial assets.
As purpose driven organisations, it’s important that not-for-profit investors tailor their investment strategy that is specific to their organisation’s objectives. As the global economy continues its uneven transition through the pandemic, not-for-profit investors should aim to be flexible to best ensure they are able to deliver on their purpose. With this transition underway, potentially involving changes in monetary policy settings, not-for-profit investors should review their investment objectives and strategic asset allocation to ensure they remain aligned to your purpose and provide sufficient flexibility. An aspect of this review would be to identify characteristics particular to your organisation that may be advantageous from an investment perspective. These would include your investment horizon, liquidity profile and tax status.
An important part of reviewing your portfolio’s objectives and strategy is to consider how economic and financial risk outcomes could impact the delivery of your organisation’s purpose. History has shown that significant negative events in capital markets have different drivers to their inception, with examples including economic growth downturns, unexpected inflation surges or policy missteps by central banks and governments. Some key questions to ask would be which risks matter most to your organisation, both with regard to the investment corpus and delivery of services? In light of the consensus outlook for the economic environment, what are the risks of higher inflation to your organisation? Finally, which risks could and should be hedged?
Risk events can also present opportunities, particularly in the event of market dislocations. A good way to be prepared to take advantages of such events is to review and understand your organisation’s liquidity requirements. The fluid nature of the global economic environment could highlight the need to consider alternative strategies, possibly entailing some illiquidity, that will enhance risk adjusted returns throughout the market cycle. Understanding your liquidity profile requirements is key to making dynamic and tactical decisions.
The impact of COVID continues to impact not only financial markets, but how societies and economies function. This has flowed through to the operations of not-for-profits and continues to have an impact in 2022. Many organisations may still be leaning on their corpus funds more heavily than average to support their operations. Whilst these are usually expected to be short-medium term actions, it remains important for not-for-profits to understand the impacts of higher spending levels, should they be needed over the longer term. A review of spending policy and spending rates would be beneficial, particularly if the higher spending levels are not in alignment with the investment strategy.
The outcomes from COP26 highlighted the importance of not standing still on Environmental, Social and Governance (ESG) matters. COP26 saw several commitments made by global leaders and JANA’s belief is that for every public sector commitment to climate, there is opportunity for private capital to secure a return on investment and the future of the planet.
There is now a clear and proactive global trend to decarbonise the global economy. This transition will have implications for the way businesses are run and how asset owners invest. Policy needs to address issues from carbon emissions to physical impact mitigation and structural trends associated with climate change, such as water scarcity.
Amongst other ESG related actions, we recommend NFPs undertake carbon-footprint analysis and aim to chart a course for alignment with global climate targets. There is an opportunity now for NFP investors to “future proof” their funds and protect against and capitalize on the transition to a lower-carbon world.
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