These are worrying times for many. The financial implications of the tragic health pandemic will be wide ranging, affecting people’s employment income, savings and retirement pots. As investors with a long-term perspective, we are working hard to protect our clients’ investments and help them achieve their objectives. In doing this, we are considering two major issues; the immediate one of whether our portfolios are protected from the sudden and savage economic shock and the second, what the investment landscape will look like once we have been through the worst effects. Both factors are intrinsically linked.
The first is all about company balance sheet strength, secular or structural demand, levels of flexibility on costs and margin protection. When markets fall there are always defensives stocks. However, they are not always the same ones, and this has been very apparent this time around too, as tech now seems to be a new-age defensive.
As for the investment landscape, we believe that themes post Covid-19 will closely resemble the themes that have driven equity markets over the past few years. However, the themes will be, as Schneider Electric stated in its first-quarter 2020 results presentation, ‘fast forwarded’. Below, I consider five themes which I believe will drive equity markets in this changed environment.
Ways of working and communicating will undoubtedly change radically to adapt to new practices. Working from home and relying on remote access will be accepted as an increasingly viable way to operate normally and reliably in virtual environments. Technological development is the enabler of this progress. Our world will evolve further into the clouds, hosting ever-smarter virtual applications that accelerate corporate productivity and efficiencies.
It is clear industrial disruptions, whether from a global pandemic or other economic shock, make managements look closer at their business models. Automation allows companies more flexibility on costs and capacity which, in turn, ties-in with digitalisation and technology, all of which offer structural demand.
We have written about health care issues many times before. This pandemic has highlighted issues of insufficient healthcare capacity and resilience, particularly in countries where the sector has seen cuts to spending in recent years.
Expect these spending cuts to reverse as electorates demand a more resilient safety net for the day when they come to rely on the healthcare system they have funded. This may require a rethink in terms of some of the social contracts in place between the public and the health sector, especially with regards to the level of private sector involvement in healthcare provision and the size of contribution that individuals expect to make. Focus will also increase on ensuring that public are getting value for money in areas where there is little innovation, like generic drugs and relatively standard equipment and medical procedures. This creates an environment ripe for disruption by smaller, med-tech companies that can bring new solutions to the table.
The dangers of outsourcing the majority of production to a specific geographic area were becoming more apparent due to trade issues before the current pandemic. De-risking supply chains will now be at the top of management priority lists and probably many governments too.
Given this is the Soapbox, I wanted to finish by bringing this back to sustainability. Sustainability is the most important aspect of the investment case for a company. A close look at the company’s environmental and social impact, as well as its governance polices is vital and intrinsically linked to its strategic competitive positioning. I forecast an increased demand for renewable energy and products and services that will allow the world to function in a cleaner, more effective way than in the past. There are many nuances to this trend and I strongly believe that much of this is still not fully understood by a significant part of the investment community, namely passive and ‘value’ investors.
About the author
Michael Nicol is an investment manager with responsibility for European equities and the global equity fund. He joined us in 2017 from Dundas Global Investors, where he was a Partner. Over his tenure, Michael has held a number of positions managing European equity funds including Midmar Capital LLP/Pengana Capital, Glasgow Investment Managers, Martin Currie, SVM Asset Management, PIMCO and Dunedin Fund Managers. Michael studied Business Studies at Robert Gordon University and has over 30 years’ industry experience.
*As at 30 November 2019.