There is little chance that the world will go back to how it was before the coronavirus crisis, according to fund managers, as it has already sparked massive changes among markets, the workforce and governments.
Much discussion has been given to what the eventual recovery will look like - if it will be V, U, W or L-shaped – but the full impact on coronavirus will be much more than the size of the economic hit or the depth of the bear market.
Indeed, the crisis could prompt changes that last for decades after the virus has been dealt with.
Premier Miton Investors multi-asset fund manager Anthony Rayner said: “The narrative around the shape of the recovery often makes an important assumption: that things will eventually return to how they were, the only real doubt being the timeline.
“We think this misses a key dimension: many things will be permanently changed, in large part because the impact and subsequent response to the virus have been so substantial.”
Performance of equity markets in 2020
Source: FE Analytics
With this in mind, Trustnet has asked several fund managers what they think the major differences will be once the coronavirus crisis has been resolved.
Although there are plenty of opinions on how the world will change for better or for worse because of the pandemic, one common theme among the investors we spoke to is how companies will have to put less of an emphasis on returning cash to their shareholders.
James Thomson, lead manager of the £1.8bn Rathbone Global Opportunities fund, warned: “We should be a little bit careful about the world looking forward.
“A lot of companies been running very lean going into in the pre-coronavirus world. They've been running with high levels of capacity utilisation, very low levels of just-in-time inventory and higher levels of debt,” he explained.
“I think a lot of companies are going to realise they need more of a buffer going forward to deal with future shocks. That could mean lower returns, lower margins in the future across the corporate space.”
Stephen Yiu, manager of the £249m LF Blue Whale Growth fund, thinks that many companies will struggle to recover in the post-coronavirus environment – although there will be some that prosper.
“If you think about world GDP as a pie, before Covid-19, you’d have travel, oil & gas, airline – indebted companies – all sharing a certain portion of the pie,” he said. “When world GDP recovers, the cut of the pie will be very different. Certain companies will get a bigger share of this new pie.
“There are a lot of companies that will not come back from this. Even if they do recover, they will not recover fully. Even if the world GDP recovers fully, these companies will have a smaller size of the pie. This would mean they would have to cut back on a lot of things they were doing before.”
Like Thomson, Yiu therefore sees a world where companies have to be much more disciplined when it comes to their capital allocation, with less cash been used to fund share buybacks or pay out dividends.
Of course, not every company will suffer this fate and the manager tipped Microsoft as one that is likely to benefit from coronavirus as more people use its services.
“A few years from today Microsoft will probably be a bigger company. Why would they have any issue buying back shares, or paying a dividend, or carrying out ESG [environmental, social & governance] investments?” he asked.
James Mee, lead manager of the £78.3m Waverton Multi-Asset Income fund, thinks that coronavirus will definitely change areas such as working practices – as more people embrace flexible and remote working – while trends such as offline-to-online retail, de-globalisation of supply chains and the move to paperless money will be speeded up. Some things will remain the same, however, such as democracy being the political system of choice.
Jamie Ward, manager of the £56.3m TM CRUX UK Core fund, currently expects at least three big changes in the post-coronavirus world.
“One, businesses and employees who can work from home probably will; long term this could have all sorts of profound effects from house prices, as people are less wedded to certain cities, to carbon emissions as people commute less,” he continued.
“Two, new regulation regarding health & safety, which may require regular health monitoring in order to do things that, in a pre-Covid-19, we took for granted; initially, this will seem disruptive and intrusive but we will adapt.
“Third, possible declines in returns on capital, as the world reassesses the wisdom of just-in-time business practices, which inherently assume businesses and consumers can get anything they want or need whenever it is wanted this crisis has shown that there is fragility when organisations forgo strategic planning.”
UK coronavirus cases and deaths
Source: Pantheon Macroeconomics
Phil Smeaton, chief investment officer at Sanlam Private Wealth UK, noted that “necessity is often the mother of invention” and companies across the UK have adapted to remote working at a scale and speed that was previously unimaginable.
This means that the country’s technology infrastructure is undergoing an intensive stress test and employees are learning new ways to work and interact. Smeaton said “there is no doubt” that this will aid future levels of productivity – something the UK has struggled with for some time.
“The crisis has also highlighted some weaknesses though, showing that companies have optimised supply chains for efficiency to deliver goods and services at the lowest cost to consumers,” he added.
“The scale of this disruption shows that consumers may need to pay a higher price for goods to improve the resilience of supply chains, diversifying more geographically and also potentially moving more production locally.”
Alex Rowe, lead portfolio manager on the Nomura Global Sustainable Equity fund, said there could be “one glimmer of hope” amid coronavirus’ heart-breaking impact on human life and the economic fallout we can expect in the months ahead: a positive shift in what is expected of companies and social responsibility.
“Efforts to combat the pandemic has taken priority over shareholder returns and the perception of the companies’ role has drastically shifted. This is evidenced by backlash against healthcare companies potentially profiting from developing solutions and the public chastising of certain automobile manufacturers over ventilator price negotiation,” he said.
“We believe that in a post-coronavirus world the expectations of society and investors in regard to total corporate impact will stay with us in some form for some time.”
Over at Premier Miton Investors, multi-asset manager Rayner argued that the post-coronavirus world could look very different today – with the crisis sparking a significant shift in how citizens view the government and their relationship with it.
In the recession of the mid-1980s, US president Ronald Regan said “government is not the solution to our problem; government is the problem” and the neo-liberalism of Regan and Margaret Thatcher became the dominant political model for decades.
However, the current crisis has demonstrated some of the limitations of a dominant free market and small government.
“A strong and larger government is not only less offensive, it is suddenly socially acceptable,” Rayner noted.
In addition, more liberal Western democracies have in many ways fared less well in the crisis than more authoritarian models such as Singapore and many citizens in the West now consider security and health to be more important than civil liberties.
“Increased state surveillance is suddenly more acceptable in the West, albeit more subtly than in societies like Russia and China. Increased control can also be seen at a policy level, with policy makers now not just managing their yield curve but also increasingly managing parts of their economies. In all areas, once the crisis subsides, we suspect most of these new powers will not simply be handed back,” Rayner finished.
“More fundamentally perhaps, there will be an impact on values. For example, society has been reminded of the importance of collectivism versus individualism. Take the seemingly new term ‘key workers’, which immediately elevates nurses, farmers, food retail employees, carers, etc., areas which have arguably been undervalued over recent times. Similarly, the value of the NHS has been reaffirmed as an important part of the overall social contract between government and their citizens.
“In a very short period of time, socially acceptable words are now ‘nationalisation’, ‘strong state’ and ‘universal basic income’. Likewise, socially unacceptable words are ‘redundancy’, ‘privatisation’ and ‘paying dividends’. The rules have been broken, ironically perhaps, by the rule makers.”