Last year, lockdowns were the end in themselves – the only weapon we had against COVID-19. How long would they last? What would come after? Was it even possible to find a vaccine in a reasonable timeframe? Now, things are very different.
Lockdowns have become a means to an end. We have an effective vaccine (in fact more than one!) and what seemed like an insurmountable problem, has been turned into one of logistics and manufacturing.
As ever, we think that a longer-term view is necessary, and perhaps even more so given the short-term noise.
These are still significant obstacles but there is a clear path to success and the human race has had over two centuries of vaccination experience to draw on. We believe that despite the emotional setback of the most recent lockdown, the reality is that the end of the COVID-19 crisis is now within reach.
Part of our job as your advisers is to think about what’s ahead. That doesn’t mean making pinpoint accurate prophesies though. We try to form a rough picture of the future, which we then adapt, improve, change and update. It is about building a narrative but being prepared to challenge it as events unfold.
Here are a few of the themes we think will be important in 2021 for our clients.
Thinking local, not global
Most of the time, problems aren’t global in the way COVID-19 has been. Normally, economic events tend to be localised – limited to certain countries and regions. Investors will need to remember that over the next twelve months.
Across the world, government spending has risen, and interest rates are low – every nation had the same response to the pandemic. But countries are likely to plot different courses out of the current state of emergency. Some will look to stimulate growth, whereas others might try to cut back on spending. And different priorities will be emphasised – while the US looks to build its green energy infrastructure, Europe may be spending more money on technology, while Asia focusses on manufacturing. Here in the UK, we do not anticipate a return to austerity. Neither Boris Johnson or Rishi Sunak support austerity and would prefer to stimulate the economy to promote recovery and to grow out of debt.
The differences in interest rates and debt will be particularly relevant for government bond markets. Every country in the world is in more debt than it was this time last year. Monetary policy may start to become idiosyncratic once more – with some central banks prioritising the control of inflation by raising rates, while others prepared to keep things looser for longer. Investors will need to decide what they value most in a government bond. Is it the overall return after inflation? Is it the safe haven characteristics? Is it the issuing country’s debt pile? Diverging views will mean diverging returns.
Inflation isn’t just a memory
It’s been a long time since investors in any developed market have had to seriously consider the impact of inflation on their portfolios. Partly, this is structural, with the cost of basic goods such as food declining over decades as technology has continued to drive down prices. But there are some signs that more cyclical bits of inflation could be heading our way.
The COVID-19 crisis has resulted in a flood of money being pumped around the financial system. This happens during most financial crises and tends not to be inflationary because demand takes a long time to rebound – people don’t go and spend the money immediately; it trickles in over years. However, the development of vaccines might mean that this recovery is a lot faster – the trickle could be a flood, with lots of spending driving up prices of goods and services.
This won’t be an inflation shock like in the 1970’s but will certainly feel very different to the last few years. Investors will be looking for assets which hold their value, either through explicit inflation-matching guarantees, or through the potential for growth. Again, some government bonds could struggle.
More diluted equity markets
Concentration in equity markets is at all-time highs. Five companies make up 22% of the US equity index – Apple, Microsoft, Amazon, Facebook and Alphabet (Google). In China, the situation is even worse; Alibaba and Tencent are 30% of the stock index. These tech giants aren’t going to disappear, all of the businesses consistently generate incredible amounts of revenue. Their time in the sun might be over though.
Two things threaten these businesses and their dominance of equity markets. First is their valuations relative to other industries. While all of the companies are likely to keep growing, investors are becoming more alert to how much it costs to invest in that growth – these stocks are now quite expensive. As the recovery starts to take hold, opportunities are emerging in other sectors. An industrial company may only be growing at half the rate of an Amazon or Google, but if it is a tenth of the price, that starts to look interesting.
At the same time, these massive tech companies are finding out that getting big and powerful means making enemies. Governments around the world are looking at two things in particular – the amount of influence that is wielded on ordinary people, and the amount of cash that is being made. As mentioned earlier, governments are worried about their debts. Taxing big tech companies, wins hearts and minds and helps the bank balance. We expect lots more regulatory scrutiny in the next twelve months, particularly of the biggest names in the world.
ESG goes mainstream
The UK is hosting the UN Climate Change Conference in November 2021. Previous events haven’t really made much impact on the public consciousness. That won’t be true this year.
Just counting the number of television adverts for electric cars suggests that something has changed. Consumer preferences are already shifting towards prioritising environmental, social and governance (ESG) concerns. That trend is not going away. Whether it is sustainable shopping, or clean energy, or ethical considerations about a business, investors need to start getting comfortable with going green.
The key problem with ESG investing has always been consideration of what an investor is missing out on. There have always been far more non-ESG businesses than ESG-friendly ones – the universe has been quite limited. But as consumer habits change, so businesses change. Over the next year or so, companies that wilfully ignore ESG aspects of their business will find it harder and harder to win investment and raise capital. Sooner or later, every portfolio in the world will be a shade of green. As our clients will know, we are ahead of this trend and already incorporate ESG funds into our portfolios.
The other same but different aspect of the new year is Brexit. Like every single one of the past four years, this one has begun with an intense amount of discussion on the UK’s relationship with the EU. However, unlike before, we now have a deal.
Of course, there will still be lots and lots of trade agreements to be done. Indeed, more bilateral trade deals are part of the point of Brexit. However, we are hopeful that the inflammatory nature of the issue will start to die down, as the aspects and negotiations become more and more technical and industry specific. More importantly, distracting headlines about a ‘No Deal’ have disappeared.
Arguments and discussions over the past impact and the future direction of Britain are going to be with us for decades. Where we can, we’ll try to spend the next year thinking about some of the other trends mentioned here, rather than Brexit.
May we take this opportunity to wish you a happy and prosperous new year, with optimism of a better year to come.