Newton Investment Management looks at how investors should prepare their portfolios for the structural shifts caused by the Covid pandemic.
It was a year like no other. The events of 2020 changed the way we worked, the way we shopped and how we interacted with our friends and family.
But the Covid-19 pandemic did not end when Big Ben signalled the arrival of 2021. Despite the start of a vaccination programme, its impact will continue to touch our lives for years to come. Making sense of Covid-19’s impact and how the challenges of tomorrow can be addressed was the theme of Newton Investment Management’s annual conference. At Fast forward: a journey to the future of investment Newton’s experts explained what changes could be waiting for us in the years ahead and what the implications could be for investors.
2020 – The future accelerated
In 2020, the Covid pandemic forced schools and offices to close, grounded planes and sent unemployment to levels last seen during the great depression. To support their economies, governments had to borrow unparalleled levels of capital, while Zoom, Teams and Webex rose from obscurity to become conduits of our professional and personal lives.
For investors, it was an extraordinary year with the pandemic accelerating key trends that are set to become the structural norms of the global economy earlier than expected. For Ed Geall, a thematic research analyst at Newton, some of these key themes are clean energy, online education, digitalisation and China.
Renewable energy shone through in 2020. Despite the challenges brought by the pandemic, more power was generated from cleaner energy sources than ever before. Political will had been moving in this direction in developed and emerging economies, but there were concerns that the infrastructure was not sufficient for governments to reduce their reliance on fossil fuels.
Another trend accelerated by the pandemic is online education. When 1.2 billion children were forced out of the classroom last year, some educational boards, including those in the US and China, moved their teaching online. This structural change is forecast to almost double the value of the global online education market to $350bn (£264.6bn) in the next five years from $190bn (£143.6bn) in 2020, Geall said.
Disruption to the hospitality sector has changed consumer experiences. Before the pandemic, people went to the cinema, went to see a show and enjoyed holidays in the sun. But consumers have had to find alternative experiences and so have embraced e-gaming and streaming TV services.
“Before the pandemic three to four streaming subscriptions were considered a luxury,” Geall said. “But by March, it was increasingly seen as a necessity. From the Premier League to Tiger King, streaming services look set to dominate our experiential lives post-pandemic.”
Covid also highlighted the West’s reliance on China in its supply chain. The world’s second largest economy supplies 95% of ibuprofen and 90% of antibiotics to the US, for example. “When it came to critical imports of medical supplies, Western policymakers were left red faced,” Geall said.
“When supply chains break down, as they did during the pandemic, the chaos that ensued was the result of decades of supply chain mismanagement,” he added.
The pandemic has accelerated digitalisation, while challenging globalisation, said Curt Custard, Newton’s chief investment officer. “It is important to look at the ebb and flow. The marketplace has reacted to the pandemic by moving everything online. A lot of those behaviours will revert back. The high streets will open again. People will get back on planes again.”
But some changes will be permanent. “A Zoom meeting will be more cost-effective than putting someone on a business class flight to New York,” Custard said.
Putting 2020 into context, Suzanne Hutchins, head of Newton’s Real Return team, said QE did not help the real economy, but had inflated asset prices. “We expected, at some point, a fiscal response,” she said. “The Covid pandemic, combined with the oil price crisis, has been that catalyst.
“We feel as though the period of transition has accelerated and that huge structural changes are happening, not only from a climate change point of view, but also in terms of social unrest and distribution of wealth.”
Even compared to the financial crisis, the events of 2020 are unparalleled, Hutchings added. She sees opportunities in emerging-market debt and equity thanks to a weak US dollar and population growth. Factoring in the potential for rising price levels, she would also consider gold and inflation-linked securities, which perform better in inflationary environments.
Digitalisation is not just about watching TV or playing games. Technology is reshaping the world, and the lockdowns ordered in response to the pandemic have forced more people to work and shop online.
“In the first 10 weeks of the pandemic, the buying of goods online increased as much as it did in the previous 10 years,” said Jonathan McMullan, a research analyst covering technology, internet and media.
Investible areas in the digitalisation trend for Newton include cloud computing, artificial intelligence, digital transformation, fintech and the rise of dominant internet platforms.
Another trend is the proliferation of semi-conductors where microchips are being used in a wider range of products, such as learning servers in data centres, industrial robotics, smart consumer technology and electric vehicles. “Faster, cheaper and energy-efficient chips are driving this growth,” McMullan said.
Innovation in cloud computing means that starting an online business costs a fraction of what it once did. It also provides access to machine-learning capabilities which can generate insights from vast quantities of data. “Public cloud services are less than 10% penetrated, meaning that the runway for growth is tremendous,” McMullan said.
Growth prospects are also strong for software subscriptions. “Over the next five years enterprise spending on software as a service is expected to double,” he added.
Shopping is heading for huge structural shifts thanks to machine learning and artificial intelligence as buying goods is set to move from the physical to the virtual. This will personalise shopping by switching from one-size-fits-all promotions to targeted discounts and let people visualise how furniture will look in their home before buying while goods could be delivered by drone.
“The pandemic has fast forwarded these trends, taking us closer to a digital-first future,” McMullan said.
Among the winners here will be the tech companies that allow retailers to move more efficiently to online from offline.
The future of a manipulated world
Brendan Mulhern, a global strategist in the Real Return team, believes that by 2035 the state will play a larger role in peoples’ lives. He sees unemployment as being potentially low as the furlough payments introduced in 2020 could morph into a universal basic income programme. He imagines that every country is likely to have a national industrial policy to avoid being overly reliant on China for manufactured products, and he believes that the US’ relationship with China will remain frosty in 2035, but owing to intellectual property issues, not supply chains.
Suzanne Hutchins expects inflation to be a lot higher than it is today. Alongside the asset classes she mentioned earlier, commodities and cyclical equities are on her watchlist. “Areas to avoid include bonds, which have been a highlight in terms of performance over the past decade,” she added.
The pandemic has not only caused recessions but also created health and social-care emergencies. It has changed investment approaches in relation to the Sustainable Development Goals (SDGs) with a greater focus on social issues. By 2025, Sakshi Bahl, a responsible investment analyst, expects to see improvements in health care and digitalised education, and a revival in public-private partnerships. So, impact investing is firmly on investors’ agenda.
“The pandemic taught investors that top-scoring ESG companies can make the headlines for the wrong reasons,” she added.
“Some investors missed that ESG alone cannot de-risk an investment, that they need to invest with a purpose, have a vision that delivers outcomes not just outputs, and re-imagine capitalism that cares for ‘us in the future’ rather than ‘me in the present’.” Speaking as if she was living in 2025, Bahl said: “Interestingly, ESG was all the rage five years ago but it took Covid-19 to put the “S” firmly centre stage.”
A good way of achieving social goals is to improve the management of supply chains. Common issues include child and forced labour. Ian Burger, Newton’s head of responsible investment, said that he has seen estimates that 152 million workers around the world are classed as children, half of whom work in hazardous conditions.
Burger said that it can be challenging to control supply chains because of size and complexity but underlined the importance of being on top of things, using Boohoo as an example. The online clothing retailer’s share price halved when one of its suppliers was under investigation for modern slavery.
Newton has always engaged with companies to improve supply chain standards. For example, the firm has successfully worked with a miner in DR Congo which led to improvements in its labour and environmental practices.
Engagement is also needed when it comes to climate change. Last year proved that the consequences of the issue are all too real with bushfires in Australia and the US as well as unprecedented temperatures recorded in Siberia. Yet Andrew Parry, Newton’s head of sustainable investment, is optimistic that such events might be averted as more and more governments are taking action.
China, the US, Japan and Korea have committed to achieving zero-carbon targets, while Vladimir Putin has talked about preparing for a similar goal. “This is important because to generate change we need governments to change it,” Parry said.
When it comes to the question of energy transition, Newton has taken a stance by being significantly underweight in oil and gas and opted for electrification and energy efficiency exposure.
“Our view is that oil companies are going to play a part in the energy sector for the next two decades or more, but the opportunities are not there,” said Rob Stewart, head of responsible and charity investment.
“The four-fold rise in spending is in renewables. This is where we believe the real growth and opportunities will be.”