The recovery in global financial markets from the lows of March 23 continues to astound. We all know the bad news. 35 million cases of coronavirus, the millionth death and the human suffering that underpins these statistics. The damage that is still being wrought with business failures mounting and unemployment, while improving from lows, is devastating in its social and economic impact.
How can it be that share markets are hitting all time highs?
The corona recession and the response to it, is transforming the global economy and transforming the business landscape. New trends in business, society and the economy are emerging. These have had, and will continue to have a profound effect on the pricing of assets, and are reshuffling the pack on which asset classes, sectors and companies are winners and losers.
While it is easy to scratch our heads at the pace and magnitude of the rally in risk assets over recent months there is no doubt that these new trends are driving relative returns. Clearly understanding how they play out over the long term will be key to generating attractive returns in the future.
To date our team, our investment process and most importantly the companies we invest in, have navigated these shifting sands well. Our portfolios have posted solid returns in absolute terms, and very pleasingly have solidly outperformed the market over what has been a trying year. Active management has delivered on its promise.
Covid changes everythingI am stretching a little with the headline but there is no doubt that we are living through a time of significant change. This is happening across multiple, often times, inter-connected spheres
Business trends - coronavirus, the subsequent lock downs and the behavioural changes that have occurred to mitigate its spread, have triggered wide scale change. There has been the creation of new tremds, dreaded Zoom calls that have become pervasive are an example, and some trends already underway have accelerated rapidly. There have been deep cyclical slowdowns in some industries - that may morph to entirely new long run growth trajectories. The laundry list of changes is long and I won’t go through them all here, we consider some in depth in the pages that follow, but rapid digital transformation, e-commerce and omni channel retail investment, and work from home all good examples of the trend changes businesses are adapting to.
Social trends - at the same time business and the way we interact with businesses is changing the pandemic is leading to social change. While that’s outside of the sphere I would normally comment on as an investor, they are important and will likely have flow on effects to government policy across the globe and hence lead to economic and market impacts. At the top of this list is the impact on income inequality. There is little doubt that the economic cost of the pandemic is being borne by low income workers and has disproportionately impacted woman. While job keeper programs have offset some of the short term impacts it is likely that longer term programs to address income inequality will follow. It would seem noting is off the table. What would have previously been considered fringe policies like a Universal Basic Income look like real possibilities if pandemic unemployment trends don’t change.
Economic trends allied with social changes are the impacts that coronavirus is having on the global economy. We are all becoming very familiar with these. Interest rates have fallen to zero or near zero in almost every country around the world – the entire New Zealand Government yield curve out to five year maturities had negative market yields at one point in September. That’s not something when I first started working in markets in the 90s I thought would ever happen. Governments all around the world are borrowing heavily to guide economies through the pandemic induced slump. They are betting that getting to the other side with as little damage as possible, and then dealing with the resulting debt mountain, is smarter than the alternative. I agree with the policy but it’s hard to believe it won’t have profound long term consequences.
Structural versus temporary and the importance of being dynamicInvestors, companies and economists (!) are having deal with significant change. Managing through periods of significant change raises the stakes.
It makes it important to form clear judgements about the direction and rate of change and it means that being dynamic and adjusting strategy becomes more important than ever.
if you have any questions please call me on 021 398 886 or email [email protected]. It is always great to hear different perspectives and there is always more to learn.