- chance to recover some real value from the mess -

'Sweet are the uses of adversity;
Which, like the toad, ugly and venomous,
Wears yet a precious jewel in his head'

As You Like It

What will it mean for investors once the Virus has run out of victims? What when wards are emptied, the mortuaries depopulated and the streets bustling? What will be the new normal?

Before embarking on a journey toward answers, we leave behind some cumbersome old baggage. Assessments derived from the immediate economic fallout are all but useless. Everyone knows the global economy is crashing. So too employment, company profits and dividends.
Whatever can be sensibly inferred about the tangible impacts of deep recession is now at least partly discounted. That is why equity markets plunged weeks ago. They reflected the prospect of economic loss without parallel since the South Sea Bubble in 1720. Some of the loss will be irrecoverable. So much is common knowledge.

There remain profound implications for the UK and global economies in the years after recovery. It will take time for them to emerge. We want to look past what is already plain to consider the enduring consequences for investors of two other factors. Both are intangible, one psychological, the other social.

As to the first, we are talking in essence about the importance of confidence to the stability of financial markets. Until very recently we were much concerned about the potentially confidence-sapping impact of exploding government borrowing. For the best of reasons, total government borrowing in the UK is about to climb to mountainous levels. It is set to rise from c. 2% of GDP a year ago to as much as 15% or more over the next year or two. The budget deficit is likely to quintuple from its level last year to at least £250 billion. Certainly the associated borrowing costs are extraordinarily low. However, one wonders whether such a gap between income and expenditure will ever be bridged. The contract between lender and borrower ultimately depends on global investors’ confidence in governments’ creditworthiness.

Our conclusion had been that at some point within the next two or three years there could be a steep and uncontainable rise in inflation. This remains a possibility. However, it may be that consumer spending remains so depressed by the current trauma that price pressures take considerably longer to show themselves. Printing money on the scale intended may not for the moment rattle investors’ confidence so soon as in other circumstances. After all, global investors’ decisions rely crucially on relative, not absolute, calculations. Uncertainties about the UK’s position mirror a similar apprehension about that of the USA and the Euro bloc. The UK’s vulnerabilities are far from unique.

As matters stand, the social impact of the crisis merits more attention.
We have noted before now (see article Sept. 2015) the isolation that detaches much of the financial sector from the community that supports it. Its behaviour has exhibited little sign of social awareness. Wider society too contains its own divisions. These crystallise in a perceived estrangement between “privileged elites” and the rest of the country. In both cases it comes down to a lack of social connectedness. Response takes political shape in the form of government initiatives to tip the balance of public spending from the South and East to the North and West. Piles of new money are to be directed towards the industrial heartlands. Johnson seeks to reconnect government with the political constituencies that matter to it.

The Virus has reinforced the need to reconnect our society. Only now is the citizenry rediscovering the true value of those who provide critical services used by all of us. The voice of the forgotten will be heard. The whole of society now recognises the indispensability of public services, especially the NHS and social care sectors. Response to crisis has stripped government of its cloak of austerity. Protestations about previous funding increases are seen as contemptible. The scale of demand growth experienced by the health sector has been obvious for years. Policy will be realigned to address the plight of the low paid. Their real incomes have barely risen over the last ten years. They are also the most susceptible to infection. The Virus is awakening the country’s conscience.

Reassessment of national priorities comes at a time when, until a few months ago, profits in the private sector were running at a record high. Asset prices in America and the UK (equities and bonds) reached a new peak early this year. Incomes of a mere 1% of UK workers comprised 14% of the national income. Austerity for capital owners has been an airy conception. Parliament has recognised the fires raging across the political hinterland. Its response has been avowedly empathetic. The idea of
“One Nation” Toryism has acquired some meaning. It would make little difference whether the government today were led by Conservatives or a Labour Party led by Starmer. Policy is being reshaped on lines broadly supported by the Opposition. Doctrinaire initiatives have vanished from the agenda.

Under these circumstances it is hard to envisage any return to freewheeling exploitation as the private sector has known it. Too much has changed. A People’s Government runs the show. The Virus is reconnecting power with the whole populace.

Investors should expect continuing intervention in the workings of the private sector in response to Virus-induced pressures. Spurred by the growing insistence of socially conscious shareholders, authority is zeroing in on several targets: dividend distributions by big companies; the structure of remuneration in the financial sector and elsewhere; undue delays in payments to policy holders by insurance companies. A broad range of other sectors, especially those energy and travel-related face similar interventions alongside new social constraints.

Investors with medium-term horizons need not despair. With the process of reconnection well underway, it becomes possible to discern new opportunities. For sure the energy, travel, leisure, financial and doubtless other sectors will have to bow to a new order of priorities. But the most agile will survive. In the UK alone, we believe a large number of new opportunities are likely to emerge in the healthcare, communications, infrastructure and, as ever, service sectors.

Even so, the spectre of risk, unquantifiable as it often is, will haunt investment perceptions for years to come. Investors will be reluctant to look so far into the future when assessing a company’s potential return. Valuations anticipating far-distant earnings will almost certainly be challenged. That may happen even as profits recover during a gradual redistribution of the national income.

Despite all the current uncertainties we can delight in two refreshing springs of hope. The first is confirmation of the value of sustaining and strengthening ties with our disconnected fellow nations overseas. Our great UK scientists in London, Oxford and other research hubs have long been working closely with colleagues in Europe and further afield. On the global stage it turns out that American epidemiologists have been working with their Chinese counterparts all along. When in the UK’s hour of need we are forced to rely on shipments of life-saving kit from Turkey, Germany, China, wherever, one can only gasp at the absurdity of jingoistic isolationism. Are we to cope with the next pandemic on our own? Dawning reality answers that. The Virus reconnects our destiny within the community of nations.

Secondly, since “lockdown” we find the air cleaner, the streets uncongested, carbon emissions plunging, bicyclists pedalling everywhere, and a picture of residents in Delhi looking at far distant foothills of the Himalayas they have never before witnessed. The rate of climate change has been slowed, for the moment. The Virus has achieved in weeks what cajolery and aspiration could not accomplish within years. Personal menace confronts each of us with our own frailty at a time when rich Westerners have to face the global consequences of feckless consumerism. The overwhelming imperatives of concurrent crises force us all to look beyond immediate convenience.

If the crises together reconnect us with our responsibilities to each other, with our shared interest with partners overseas, with our obligations as stewards of a unique and marvellous planet we will have gained something of immeasurable value. It will yield a priceless dividend and not only to investors. All the world’s people will share it.


15th May 2020

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