We tend to concentrate in this newsletter on just the financial metrics, bond yields, equity returns and all that jazz. I like to throw in a bit about music and films and the footy every so often to give us all a bit of a break from the heavy stuff but I don’t often stray too far into politics and societal issues because these are matters you wish to discuss with your friends and family, not the bloke who writes about the stock market. However, these ‘non-financials’ have become increasingly important to the direction of the ‘financials’ ever since 2008 and the COVID pandemic has brought them front and centre to the point where their influence on markets will be greater than ever before.
Economic history is a series of cycles and we are entering a new one. Post 1945 to the 1970s was a period of ‘Big Government’ and commitment to social welfare with the nationalisation of our major industries and the creation of the NHS. This was brought to an end by the rampant, destructive inflation of the 1970s leading to a rise of capitalism and free markets, privatisation, and a much smaller public sector as service industries replaced the old, tired, non-competitive manufacturing industries like car-making and the shipyards, the ironworks and the mines. A shift to the right politically ushered in by Thatcher and Reagan and the breakdown of communism in Eastern Europe led to the rise of globalisation. Living standards rose exponentially, it was the triumph of liberal democracy….until it wasn’t. The great financial crisis was the catalyst for change, not dramatically at the time but in a slow moving, insidious way, enveloping and discrediting free markets and ushering in an era of increasing financial and social inequality and a rise in political nationalism. An ‘America First’ US President has rolled back eight decades of history and increasingly strong and aggressive leaderships in China and Russia are looking to fill this void and assume a global hegemony of their own.
Our last decade has witnessed the creation of huge private sector monopolies whose stock market values are greater than the GDP of most countries in the world. It has been a time of increasing anger at our ‘haves and have nots’ society and rising intolerance and division in matters of race, religion and social justice. It is also the beginning of a generational divide between the baby-boomers who had had it all (yep, that’s us) and the millennials saddled with the debts of previous generations facing less opportunity in a harsher world, who are far more cognisant of the damage that decades of heavy industry and unabashed consumerism has done to our environment (yep, that’s our kids). The generational divide is defining the COVID debate because it is the older generation who are facing the health risks but the younger who are facing the risks to their education, jobs and to the freedoms and joy of a normal life.
Opening up the economy has increased the spread of infection and led to the re-imposition of restrictions. Opinions on the best way to tackle the pandemic are personal and as such equally valid; whether we should concentrate solely on eradicating COVID at any cost or whether, in Rishi’s words, we should ‘learn to live with the virus and live without fear’ and consider that the economic and societal damage, and delay in treatment of other major diseases, resulting from the restrictions is of greater long-term risk than COVID itself. Maybe a more age-stratified approach is the answer, shielding and prioritising the elderly and vulnerable but allowing those under 60 to live more normal lives, following all COVID safety protocols of course but invigorating the economy and building the immunity that ultimately will defeat the pandemic. My concern is the increasing lack of empathy with opposing views and consequent potential for the sort of bitter division we saw with Brexit as the uplifting spirit of compassion and community we felt in March and April ebbs away. Trying to balance the risks to public and health against those to the economy is a devilishly tricky see-saw, Governments need to win the trust and confidence of their citizens with rules that are well timed, proportionate, necessary and clearly communicated. Some counties have done this well, some haven’t…
The new era of ‘Big Government’ has returned out of necessity, not as a result of a change in societal thinking and the ballot box. If Governments hadn’t bailed us all out then no-one else was going to. Margaret Thatcher once said, ‘there is no such thing as society’ and David Cameron talked of a ‘Big Society’ where local communities did everything, presumably so the government didn’t have to bother. I’m not a fan of either view. Governments have underwritten huge parts of the economy and the corporate world and now need to act in conjunction with businesses, investors, households and the population at large to build a fairer and more inclusive world for future generations. This requires a more consensual, less strident, less adversarial, more long-term, forward-thinking style of government. The term ‘social contract’ falls in and out of favour with politicians but surely now is the time for a new one, to tackle the inequality of the haves and have nots, why many key workers are so badly paid, the generational divide, and the creation of a safety net for the poor and disadvantaged. This is why the US election in November is so important, and why our own government needs to demonstrate it is fairly representing all levels of society.
The changing of cycles are often marked by periods of great economic uncertainty and distress, such as the Great Depression and in our lifetime the 3 million unemployed in the UK in the early 1980s. In periods of structural change, the losers are more visible than the winners and I wonder if it is the same today. No-one wants to see wholesale closure of businesses and a job market with little opportunity for young workers but maybe one outcome of the pandemic will be an upward shift in global productivity as, in conjunction with game changing technology, a decade of progress in working patterns and e-commerce has been accelerated into six months and we are at the beginning of an improvement in the structural drivers of long term growth. There is plenty of logic to why technology and healthcare companies have been huge winners in the stock market this year and ‘old industry’ energy companies, industrials and banks have been the losers.
The COVID pandemic has forced us as individuals and as a society to examine like never before, how we live now, and how we wish our lives to be in the future. It has shown that the world needs a new roadmap for the future, not just to rebuild the global economy but to tackle social and racial inequality and intolerance, the environment, climate change, food and water security, and new alternative energy technologies. These broad themes form the basis of the ESG (Environmental Social and Governance) principles which are increasingly underpinning how corporations are managing their businesses and how investment professionals are managing their client portfolios. The long term structural trends that have been accelerated by the pandemic will largely determine future investment returns and within that, the winners will be the companies that have the best environmental and social profiles. ESG is increasingly integral to investment decision making, either at a broader ‘responsible investing’ level or with a more pro-active, targeted sustainable approach, as with our own Positive Impact Portfolios which we feel will become an increasingly important component of our clients’ investment strategies in the coming years.
I wrote in my conclusion to the main body of this newsletter that one should always remain optimistic about long term investment returns, even in the darkest times. I feel the same about life and so will leave you with a quote from one of our greatest poet laureates, Alfred Lord Tennyson
Hope smiles from the threshold of the year to come,
Whispering ‘it will be happier’