Covid Vaccine

Investment Management -

What’s next for investors: investing post-pandemic

Although there is cause for optimism, given recent progress on vaccines and rapid testing, we are still far from out of the woods with plenty of important decisions still to be made by governments, consumers and investors alike before any longer-term conclusions can be drawn from the COVID-19 chapter.

Although there is cause for optimism, given recent progress on vaccines and rapid testing, we are still far from out of the woods with plenty of important decisions still to be made by governments, consumers and investors alike before any longer-term conclusions can be drawn from the COVID-19 chapter. 

However, it is fair to say that some trends are beginning to take shape and whilst we cannot predict with any kind of certainty what the world will look like a few years from now, we believe some could impact the future of investing over the medium and longer-terms. 

Will consumers continue to spend as much on relative indulgences, like eating out or luxury goods, post-COVID? Even accounting for the fall in incomes, the UK Centre for Economics and Business Research (CEBR) estimate that household savings could be 130% higher than pre-COVID1, around £23b. Personal savings in the US averaged 8.82% between 1959 until recently, reaching an all-time high of 17.3% in May 1975. The rate increased from 8.2% to 33% between February and April this year and, despite partly retracing, still remains highly elevated relative to history.

US Personal Saving Rate (%)

US Personal Saving Rate

Source: St Louis Fed (https://fred.stlouisfed.org/series/PSAVERT)

To what extent households are willing - and able - to spend this accumulated cash is hugely important, but given the likely unemployment and continued restrictions we are cautious and expect lower spending: To take just three examples, the share prices of Whitbread (hotels and restaurants), Cineworld (cinemas) and Carnival (cruise holidays) are down 49%, 72% and 88% respectively this year. 

Exacerbating this point is probable slower wage growth as corporate profitability returns to a semblance of normality. Real wage increases in the UK have been modest to say the least since the GFC but are likely to further stagnate as the labour market, historically tight pre-COVID, becomes looser and companies remain cautious. Governments and Central Banks everywhere have thrown all their resources at fighting the economic catastrophe COVID has caused – the jury is out as to whether further stimulus will materialise to accelerate a tepid recovery.

The cause for optimism however comes from China, which was the first country to succumb and recover from the virus, and so a potential window into a post-COVID world.

The number of cases there has been extremely low for several months and spending on domestic tourism, entertainment and other consumer goods is now close to or above pre-COVID levels.

On a macroeconomic level, many industries have over time sought more efficient use of capital, driving less investment in inventories and greater use of just-in-time deliveries. COVID has raised questions about the reliability and dependence on such supply chains – sectors as varied as autos, pharmaceuticals and industrial electronics have all been affected by disrupted shipments from global manufacturing centres. 

Going forward we can probably expect a pause, and in many cases a rolling back of some of the extreme globalisation we have come to expect and the re-emergence of local sourcing of part-finished goods. This could come both from the government initiatives and/or incentives (see below) but also bottom-up, via revised corporate strategies. 

Quote -

In terms of drawing conclusions from the crisis, we need to think about how to ensure the EU’s strategic autonomy. Strategic autonomy does not mean that we should aim for self-sufficiency. Given the complexity of supply chains, this would be an unattainable goal. We need an evidence-based discussion on what it means to be strategically autonomous. For example, we need to look at how to build resilient supply chains, based on diversification, acknowledging the simple fact that we will not be able to manufacture everything locally.

–Phil Hogan, EU Trade Commissioner, 16th April 2020.

COVID could influence the manner in which investors analyse companies - those companies with built-in ‘resilience’, not just in their supply chain but with stronger balance sheets (lower debt, higher cash reserves, stronger free cash flow), could demand even more of a premium than they do now. 

For companies to achieve this, as shareholders we might have to expect lower returns: dividends could be reduced, and stock buyback schemes might be paused to shore up cash reserves or pay down debt. According to Bloomberg, 40% of the FTSE 350 have cut or not paid their dividend this year, including Shell which slashed its pay-out for the first time since WW2. Share buybacks, which have been a major driver of returns for US investors in particular over the last several years (see below), have also seen a sharp drop-off in 2020 as companies react defensively to the COVID crisis. 

S&P 500 and Nasdaq Share Buy Backs

S&P 500 and Nasdaq Share Buy Backs

Furthermore, with interest rates at all-time lows almost everywhere, buyers of investment grade and government debt have driven yields downwards. Returns in many government debt markets are now extremely low or negative, even in previously hugely risky nations, and with the US Federal Reserve essentially committed to keeping rates low for the next couple of years at least, this lower-return environment looks set to stay. 

We, as investors, have many things to ponder going forwards. COVID appears to have accelerated some pre-existing trends whilst creating potential new ones almost from scratch, and the rollercoaster shows no signs of slowing down with the prospect of somewhat ‘return to normal’ at some point next year. Whether ‘normal’ will ever return is an open question, but COVID will continue to shape portfolios for at least a few years to come. 

Selected 10-Year Government Debt Yields

Selected 10-Year Government Debt Yields

Source: Factset

Further Reading

Investing during a pandemic


Investing during a pandemic

COVID-19 has been by anyone’s measure one of the most significant economic events of the last century. The long-term impact on not just the global economy, but also on society in general, is arguably as or more consequential than the Global Financial Crisis of 2008-9.


1https://cebr.com/reports/23-billion-in-excess-savings-set-to-accumulate-in-q2-as-consumer-spending-declines-dramatically/

 

This content should be considered a marketing communication for the purposes of the Financial Conduct Authority rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.  It is for information purposes only and does not constitute advice, a solicitation, recommendation or an offer to buy or sell any security or other investment or banking product or service. You should seek professional advice before making any investment decision. The value of investments and the income from them can fall and rise, and you could get back less than you invest. Past performance is not a reliable indicator of future results. Investment returns may increase or decrease as a result of currency fluctuations. 

The contents are based on opinions or conditions as at the date of writing and may change without notice. To the extent permitted by law or regulation, no warranty of accuracy or completeness of this information is given and no liability is accepted for its use or reliance on it.  

This content is confidential and may not be reproduced, further distributed, or published without prior consent from Arbuthnot Latham & Co., Limited. The distribution of this document and the offer and sale any investments in certain jurisdictions may be forbidden or restriction by law or regulation. It may not be sent to, taken into the United States, or passed to any US Person.

Arbuthnot Latham & Co., Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Arbuthnot Latham & Co., Limited DIFC Branch is regulated by the Dubai Financial Services Authority.

Author -

Freddie Gabbertas

Freddie Gabbertas

Investment Management, Head of Emerging Market and Asian research

Freddie joined Arbuthnot Latham in 2016, and is head of Emerging Market and Asian research. He sits on the Global and European equity and Fixed Income pods, whilst also looking at Ethical and ESG mandates. He holds the IAD and IMC qualifications and graduated from University College London with a B.A. (Hons) in Geography. 

Find out more about the Investment Management Team