Covid-19 has accelerated many of the trends that were already in place before the word ‘coronavirus’ entered the everyday lexicon. Although vaccines have begun to be rolled out and this year promises some semblance of normality, the consequences of the pandemic for markets and economies will be long lasting and deeply structural. While the short-term outlook is probably more in the hands of scientists than politicians and central bankers, there has probably never been a more difficult or important time for policymakers to ensure they navigate a very treacherous medium-term outlook. But what does this mean for investors? 
Technological acceleration
There is no doubt that the way we consume, work, travel and communicate was changing long before the pandemic. However, many of the trends that have accelerated, such as home working, online shopping and increased internet usage, are here to stay. The UK equity market is not deemed to be technology-heavy at a sector level, but every company now has technology embedded in their business. What really matters is how they use it to augment their business model. It is therefore important to own companies that come out of the pandemic in a stronger position than when they went in; companies such as clothing retailer Next, with its superb online distribution model, Ascential, which optimises digital retail for the world’s largest manufacturers, and GB Group, with its strong position in online fraud and identity verification, fit this bill.
It’s the economy, stupid
We have just had the largest peacetime shock to the global economy on record and yet one would assume from the strength of markets that once populations are vaccinated it is business as usual. I believe nothing could be further from the truth and many of the weaknesses of the UK economy before the pandemic have only been exacerbated further. The Office for Budget Responsibility (OBR) is now forecasting an 11 per cent fall in UK GDP for 2020, the largest annual drop since the Great Frost of 1709.
Given that more than two-thirds of UK GDP is domestic consumption, much of this reflects the rise in the savings ratio from 5 per cent to as high as 28 per cent. Of course, much of that increase in savings has been forced as consumers could not spend and so the rebound in the economy will reflect the subsequent fall in the savings ratio as shops re-open.
However, the OBR assumes that we retrace back to the previous low levels of savings and consumers spend as they did prior to the pandemic. I just do not see that as credible as we will be in a period of higher unemployment and increased economic uncertainty. I believe precautionary savings will remain elevated and thus the ability of the UK economy to rebound quickly is very unlikely. Furthermore, although a thin trade deal has been announced with the EU, it remains to be seen how challenging the transition is for businesses, so there are tough times ahead for the UK economy.
The end of the road for the monetarists?
The final trend is one that may not fully play out for many years but is probably the most important for long-term investors. Can regulatory authorities navigate a path back to growth and out of the increasing constraint of government debt?
Quantitative easing (QE) does not make consumers spend, or businesses invest. In economic terms, it increases the money supply but does not necessarily increase the velocity of circulation of that money in the economy. The pandemic has thrust QE once more into the limelight as the UK government has seen a forecast £57bn fall in tax revenues in 2020 and a £281bn increase in spending. The Debt Management Office is therefore selling billions of pounds of gilts every week to fund the £394bn annual deficit. It is not an accident that the Bank of England has increased since March the amount of QE targeted by £250bn to £895bn; effectively the Bank of England is financing all of the government’s significant gilt issuance.
This makes the UK increasingly vulnerable to any future rises in interest rates off the back of inflation, credit risk or even growth. Therefore, investors need to keep aware of the risks of a steepening yield curve; in our Ninety One UK Alpha Fund, we own names such as Charles Schwab and Lloyds, who provide us with protection on that scenario.
A diversified approach is key
In conclusion, the pandemic has left the world and, in particular, the UK in a very uncertain place. In constructing a portfolio, we can still find many opportunities of companies that can still grow, have embraced technology and will exit the pandemic in a strong position. However, we find ourselves in a deep recession, with government balance sheets completely transformed and a step-change in how we use technology. This time it is different, and the world will not revert to the previous status quo. The key for investors is, therefore, to have a diversified approach and own those companies that can navigate a world of geopolitical stress, economic uncertainty and structural change.
Simon Brazier is the portfolio manager on the Ninety One UK Alpha fund. The views expressed above are his own and should not be taken as investment advice.