The unique events of the Covid-19 crisis and its subsequent recession has meant some industries have thrived while others continue to struggle.
In March, economists were engaged in a long running prediction about what shape the recovery would take. Hopes of a quick rebound, or V-shaped recovery, were followed by slightly more sombre predictions of L-, W- or U-shaped recoveries that would be characterised by slower returns to normality.
However, Ruffer investment director Duncan MacInnes highlighted that what seems to be occurring is a widening disparity between the winners and losers of the pandemic, otherwise known as a K-shaped recovery.
“What does the K mean?” asked MacInnes.
“It means online shopping wins, while traditional retail loses. Commercial property such as offices and shops close, but logistics warehouses thrive. City apartments struggle and suburbs with gardens boom.
“The digital economy beats everything.”
K-shaped recovery
Source: US Chamber of Congress
Industries that were especially sensitive to the shutdown in global activity could well rebound next year but have lost considerable ground to the Covid-19 beneficiaries.
The investment director explained that size has been a contributing factor to the K-shaped recovery and large companies with access to the corporate bond markets have been able to take advantage of easy money policies.
“However, smaller companies and start-ups surviving on a shoestring have been starved of the oxygen of cash flow,” he said. “As a result, the big have gotten bigger.”
MacInnes also noted that while the shape of recovery is damaging for some sectors, the substantial human cost of this crisis is yet to be fully understood. But it is clear that there have been winners and losers on a personal as well as business level.
The pandemic has disproportionately hit those with low incomes, with US company PayChex estimating that low earners have had a 25 per cent hit to earnings.
“The economic costs have been greater for the young, the unskilled, minorities and working mothers,” MacInnes noted. “Covid has also badly disrupted education which is perhaps the key driver of social mobility.”
Indeed, the International Monetary Fund’s World Economic Outlook forecasts close to 90 million people around the world will fall below the extreme income deprivation threshold of $1.90 a day due to Covid-19.
MacInnes is clear that the K-shaped recovery is intrinsically unsustainable due to its lasting effects on the global economy.
“The K is not OK because it leads to a hollowing out of the economy and as we are observing it will exacerbate inequality and cost far too many jobs,” he said.
Having said that, the investment director sees the vaccines having a real impact on this growing dispersion.
“The vaccine breaks the K-shape because it offers a lifeline for the less fortunate,” MacInnes said. “Government intervention, and we expect lots more, will become stimulus rather than life support.”
MacInnes added that the LF Ruffer Equity & General fund holds several stocks primed to do well in a vaccine-led normalisation of economic activity.
The £127.7m fund has been run by FE fundinfo Alpha Manager Alex Grispos since 2007 and holds stocks such as Vinci, American Express, Land Securities and airport operations company, Aena.
As of 30 October, both Vinci and American express are in the top 10 holdings.
“Despite the large rally in these stocks since the Pfizer/Moderna announcements these investments are still deeply out of favour and yet the prospect of recovery is that much more tangible,” MacInnes said.
“The debate has moved from ‘if?’ to ‘when?
“If this value rotation is for real, then there is a clear opportunity in such stocks. There might be bumps in the road, but things are looking up for 2021.”
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
Year-to-date, LF Ruffer Equity & General has made a total return of 3.86 per cent against a return of 5.68 per cent for the average IA Flexible Investment fund. The FTSE All Share index, on the other hand, made a loss of 9.4 per cent over the same period.