Here is our take on the articles summarized below: 
While stock markets have seen an incredible recovery since the crash at the outset of the Covid-19 pandemic, other crucial building blocks of the global financial system have suffered in the background. Hopes are high for 2021, but, as evidenced by the articles below, we will also be facing much risk. It is because of this risk that portfolio hedging may be playing a crucial role in 2021.

Please note that for the next two weeks our weekly summaries will be published on Wednesday due to the holidays.

Should zombie companies be feared?

Robin Wigglesworth, Financial Times 
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There were fears of a “zombiepocalyse” among investors even before the pandemic, but the New York Federal Reserve says this fear may be exaggerated. In this article, a zombie company is defined as a company unable to cover debt-servicing costs from long-run profits. Thanks to falling interest rates that reduced debt repayments many companies which are in the danger zone have been able to stay “undead” for several years. The number of zombie companies across the 14 large economies studied by the Bank for International Settlements has increased significantly.  Following the 2008 financial crisis, this trend of low rates and forbearance was necessary to prevent mass corporate extinction. However, allowing zombie companies to “survive” could lead to longer-term economic costs. These fears have been exacerbated by the coronavirus pandemic which has resulted in a “monstrous corporate debt burden”. Economists fear this debt burden will hang over the global economy for years to come.  

In a similar tone, the New York Federal Reserve Bank in a paper published this month concluded that corporate bankruptcy and restructuring regimes are more efficient than those for individuals. Nonetheless, swift resolutions benefit both the company owners and creditors. The delay of restructurings or bankruptcies could lead to the survival of more zombie firms, resulting in the impairment of productivity growth and a general slowdown of economic recovery. Taking this into consideration, it is more important for policymakers to focus on quick and efficient restructurings and bankruptcies than low interest rates.

There’s a Toxic Cloud Behind the Stock Recovery

John Authers, Bloomberg
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Though stock markets have recovered quite well over the last several months, pensions have struggled. Retirement plans often rely on equities to build their assets, but their liabilities, which are the guaranteed incomes they have promised their members, depend on bonds. Higher bond yields make it much cheaper for pension managers to guarantee any given income by buying bonds. However, bond yields have remained extremely low and in some cases are negative. This is putting pension managers in a very uncomfortable position. According to a survey run by the British academic economist Amin Rajan and the CREATE-Research team of the U.K., nearly half of managers are going to ask for more contribution from their members this year, almost a third intend to reduce retirement benefits, and about 30 percent will give up on offering a guarantee, leaving pensioners to take on extra risk. Pension managers are bracing for inflation, a return to governmental intervention, and a switch towards redistributive policies. To deal with all of this pressure on pension plans, managers are planning to shift funds to invest more money in global stocks, infrastructure, private equity, and long-term debt. The survey also revealed an enthusiasm for ESG investing. While creating cheap money has been an adequate response for many parts of the economy to market crises over the last few decades, the pension sector has been seriously damaged by lower rates. 

‘Prospective Returns Are Low on Everything.’ Howard Marks Outlines Investment Opportunities, Risks

Lawrence C. Strauss interviewing Howard Marks, Barron’s
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The legendary investor Howard Marks addresses several issues pertaining to the effects of the pandemic recovery on the economy. He begins with a projection of Covid’s long-term effects on the social and political spheres: the damages of the lockdowns have emphasized the need for preparedness, equitable solutions, policies supporting job growth, and debt load management.  The government’s aggressive fiscal and monetary response has kept returns repressed as most assets are priced at or above their fair value, creating a risk-on environment for investors seeking returns. Lower-risk investors wait longer to enter a market, which tends to produce better results in the long term by entering at low points in the market cycle. Growth stocks have done precisely that, and while those who emerge victoriously will indeed provide significant returns for their investors, the problem is predicting who will be the winners.  All that said, with a lower risk-free rate of return, the prospective returns on all asset classes are lower in the medium term. We may be in for a period of historically depressed returns, necessitating a measured approach to risk.

Risk Outlook: Plenty to Worry About Beyond Covid

The Economist Intelligence Unit
Download the report here

While the deployment of coronavirus vaccines across the globe has given us a glimpse of the light at the end of the Covid-19 tunnel, there remain significant risks to a post-pandemic recovery.  The EIU projects a year-on-year growth of 4.2% in 2021, against a contraction of 4.7% this year.  While the actual speed of recovery varies wildly from country to country, there are several significant themes worth mentioning. Global trade and supply chains have been reshaped by the pandemic, as countries and companies alike look to diversify their production amid a shifting risk-reward landscape. Political instability is on the rise as the pandemic has exacerbated poverty, joblessness, and inequality.  Many countries are prioritizing infrastructural development as an engine of job growth amid record-low interest rates.  Assuming an effective distribution of a vaccine in the coming months, the release of pent-up demand could propel accelerated growth in some economies, while persistent unemployment concerns could unleash risks that could slowdown the recovery.  The report concludes with a series of charts documenting their growth projections for a variety of regions and countries, along with specific risks to select countries.