OECD warns of deepest economic scars in peacetime for a century

Chris Giles, Financial Times
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While the equity markets seem to have taken for granted the likelihood of a “V-shaped recovery,” a gloomy forecast from the OECD indicates many nations won’t see a return to pre-pandemic living standards for years as the impact of widespread unemployment, corporate bankruptcy, and COVID-altered living conditions create the deepest peacetime recession in a century. Laurence Boone, chief economist at OECD, sees the lauded V-shaped recovery stopping halfway, with the global economy contracting 6% this year. She sees the need for “targeted” and “flexible” fiscal policy for the duration of the economic crisis, with the stipulation that the debt, inequality, and isolationism created by the crisis will need to be addressed soon after the economy stabilizes.

New challenges and dwindling returns for Russia’s national champions, Gazprom and Rosneft

Anders Åslund & Steven Fisher, Atlantic Council
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Though Russia’s two energy giants, Gazprom and Rosneft, had revenues of $118.3 billion and $134 billion respectively last year, their financial performance has not been rewarded by the markets. Gazprom’s market capitalization has slumped 84% since its 2008 peak while Rosneft’s has dropped 50% since it became public in 2006. In addition, the companies’ efficiency, dividend yield, and P/E ratios have not met investor’s standards. Most importantly, investors are wary of investing in these Russian energy companies because of all these inefficiencies and opaque/questionable practices. As authors Åslund and Fisher put it, “These two Russian national champions have functioned less to return value to shareholders, including Russia’s treasury, than to prop up the Kremlin’s domestic and foreign policy objectives and enrich Putin’s circle of cronies.” 

Russia’s “national champions” are facing a host of new challenges due to the fact they are more so Russian President Vladimir Putin’s political pawns than they are wealth-drivers for the Russian energy industry. The primacy of such geopolitical objectives has dominated the business models of both Gazprom and Rosneft. For example, Rosneft has invested $8.5 billion in Venezuelan oil since 2010, while Gazprom has invested billions in the construction of several pipelines, including the Nord Stream, TurkStream, and Power of Siberia, in an attempt to capture European and Asian energy markets as well as prop up Putin’s political partnerships. As a result of Putin’s geopolitical meddling, the two companies are facing Western sanctions, stricter European regulation, and increased competition (especially since they have failed to become major players in the LNG trade). Gazprom and Rosneft have sacrificed their market values and future commercial success in order to pursue Putin’s geopolitically charged overseas investments. 

Why It’s Time to Rethink Bonds

Gail MarksJarvis, Barron’s
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Treasury bond yields have decreased by about 75% in the past ten years, which, according to BlackRock’s Michael Fredericks, is a bad sign for income investors. He says that the yield for 10-year Treasury bonds at the beginning of a decade typically forecasts the returns for that decade; hence, the current yield of about 0.75% (for the 10-year Treasury) indicates a decade of “incredibly low” returns. Bond investors say the drop in yields has prompted a paradigm shift, as the role of bonds in a portfolio moves from income to ballast.
A survey of advisors, investors, and analysts recommended three rules of thumb for an era of low-yield treasuries:

1. Don’t overdo risk – investors with riskier positions took a big hit in the market rout in early March. Many ETF’s offer diversification and exposure to high-yield bonds without endangering the overall portfolio.
2. Don’t ignore Treasuries – the inverse relationship between yields and prices creates an opportunity in the event of another market downturn, especially if the Fed pursues further monetization let alone negative rates.
3. Beware the urge to bargain-hunt – spreads between corporate bonds and Treasuries for the same time period are just 5% below their highs for the year. Even with the Fed’s aggressive actions in the corporate bond market, investors still have to be careful in managing risk, as the Fed is not guaranteeing default positions.

China is setting itself up to win cold war 2.0

John Thornhill, Financial Times
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The developing cold war between the U.S. and China presents many new challenges from its precursor. The modern struggle involves two nations entangled in a complex dance of economic, technological, and cultural ties. If the US-USSR struggle revolved around military hardware, the US-China struggle is one of civil software and technological innovation as the internet comes to dominate 21st-century life. Until recently, the going assumption from the US regarding China was twofold: first, that prosperity and globalization would democratize the nation, and that the internet would accelerate societal freedom. As neither trend has materialized, China has quickly emerged as the US’s primary competitor in the critical technology sector, a shift that has alarmed domestic strategists, both military and civilian. These experts see the need for an aggressive industrial strategy to keep the US ahead of China’s aspirations in the long term.