Bulletin – Strategy Update

29th April 2020

Investment Update

As the ongoing virus-related situation evolves, and it seems a long time since the start, there is a very real split of opinion in the Government, and anecdotally in wider society, over the future. We are starting to see parts of Europe open up from their stringent lockdown and wonder how long it will be before the UK follows suit.

Governments have provided the most enormous financial support to individuals and business. There is an important question mark over how long this will continue. Will there be more targeted support for longer (think about airlines and hospitality) and if not, will there be a dramatic cull of previously barely viable businesses and enormous levels of unemployment as a result?

Or, will the financial support have been enough for sufficient economic activity to remain, storing up demand for when we see the other side of this situation.

Life will change, although most of this is a hastening of trends that we have spoken of and that were well underway before the pandemic took hold. Climate change, adoption of technology and more left-leaning politics (financing infrastructure and bringing austerity towards a conclusion) were already gathering pace and seem set to continue in a greatly condensed timespan. Whether it is massive productivity gains in the NHS (and other medical services) as the emergency has overcome institutionalised inertia, video conferencing replacing much of the previously considered necessary face-to-face business meetings, right through to faster and wider adoption of online shopping and eating, there are going to be clear winners and potentially better use of time and money.

The changes will not be equal, however. The NHS will develop and adjust to a huge change in the way it works and services us all. Government now has to find and use the means to provide financial support and education to take advantage of technological opportunities.  It is not the case everywhere, and it will be considerably more difficult to arrest the spread and limit the damage in the emerging economies such as Africa or India. The effects could see the reversal of rising wealth, better education and greater health seen in emerging nations. Given the world is so interwoven, whether through travel or economic trade, until the virus is dealt with across the planet in its entirety, trade will be challenged to get back to what it was – and that is a real threat to both global security and economic prosperity.

As we look at everything that we read or hear, we see several stages to come, and a number of important areas for our consideration:

The Medical Issues

It seems increasingly likely that we need to find a way to live with the virus.  It is not going to go away, and even a vaccine might be temporary rather than offering lifelong protection.  Medical intervention is clearly fundamental to what happens more broadly to the way in which we live, how great the human tragedy, and to the degree of economic damage caused.

There are three strands.  The first is the ultimate vaccine.  Even if a successful vaccine is developed by the autumn, it will take time and effort to scale production and delivery to even half the world’s population of 8 billion.

The death rate appears to be well below initial estimates, and of course until we know who has had the virus, then we will not really have a strong idea of the mortality rate involved. This leads on to the second medical action, that of testing.  Germany has undertaken many more tests and has had a vastly lower number of cases.  It is easy to accept that much of this is due to knowing where the hot spots were and taking more targeted action accordingly.

And finally, effective treatment to reduce the worst impacts of infection.  This will enable us to deal with what are likely to be periodic waves of the disease in the future.  In the absence of a global vaccine, treating the symptoms while we edge closer to the ‘herd immunity’ that is talked about seems the most likely means of dealing with the issues in the months ahead.

Productivity and technology

What will the future look like?  It might be that the short memory of humanity means activity simply resumes when it can – and the opportunity for change is wasted.

Hopefully, there will be greater productivity and use of technology.  Here is an opportunity to reassess and focus on the better things in life.  The likely outcome that we will spend less time sitting on trains or in traffic jams to and from work and therefore have more time to spend on more enjoyable pursuits is amongst the most likely boons of the changes forced upon us.

How far this spreads to limiting our holidays abroad we are not sure, but clearly when we look at the climate challenges ahead, it is possible to change the behaviour of billions of people if the need is strong enough.

The speed and devastating impact of the virus is making organisations reassess what they have become, and technology will allow them to do more work, more quickly and with fewer people than before. This, in turn, threatens to make society more unequal; another problem to be addressed.

Debt and Savings  

Whatever else happens, we are accruing more debt than at any time in history. Governments that got the taste for staving off economic catastrophe after the financial crisis in 2009 have really gone to town in raising debt this time around, and much more quickly than in the past.

Over time this must be dealt with.  We could universally write debt off, or we could see interest rates kept low while inflation rises to erode the relative value.  Everyone has pushed that decision into the long grass: a problem for others to deal with (they hope), justifying it by the extent of the crisis now.  But for how long can we ignore this elephant in the room?

If there is going to be the most enormous amount of money in the system, it will need to find a home.  Initially more of this money is going to people rather than to banks and is therefore much more likely to be used to buy things, thus supporting the idea of inflation.  However, the other side of the coin is that people are likely to be more cautious, having had their jobs threatened or removed completely.  This will make them more likely to save and reduce personal debt, even if it means less consumption.  This might not be good for the economy in the short run but might be an incredibly powerful force for reducing wasteful emissions as we all have too much stuff in our lives. 

Our approach to the future

We have seen asset values recover from their lows in March, albeit they are still below the heights at the beginning of the year, as shown in the charts below:

It is almost without doubt that the economic fallout will be considerable, at least for the next few months, and very probably much longer.

This makes it more difficult but more important that we look at how to invest your capital in a way that ensures you have access to meaningful amounts of cash if you need it, while also providing the opportunity to take advantage if there are opportunities to buy lower priced assets, something that is quite likely to happen over the summer.

The future will be different, and it will be important to invest in organisations that can withstand the current pressure on their business model to survive and flourish on the other side of this global economic interruption.  Unfortunately, there will be many excellent smaller companies who lack the financial means to last.  

As a team we are meeting regularly using technology in all its forms to work closely with each other and with you, our clients, in these extraordinary times.  This is an extremely fast-moving environment in which we must be ready to adapt in order to both survive and prosper.

In recent months we have taken steps in this direction already. We have reduced exposure to debt and started to move from smaller companies to larger. With the issues facing smaller, developing economies in particular, we want to be incredibly careful in choosing what to invest in.  Underlying it all, we will continue our long-standing focus on the themes of the future.  The ideas of technology, artificial intelligence, healthcare and food have helped generate returns, even when other companies are struggling, and will continue to benefit from the social changes happening around us.

This is an evolution that will continue for the rest of the year, in line with the impact of the coronavirus. After Government support, there is more money than ever in the system, and for those companies having the right finances and the right products for the new world, there will be some astonishing growth to be had.

We are spending huge amounts of time and energy on these points and will continue to set out our plans to take advantage over the weeks and months ahead.

The KMG Team