Market Insights

01 October 2020 | Simon King

Thoughts on 2020: The Long & Winding Road

  • Low growth, interest rates and inflation to persist
  • Careful stock selection required
  • Challenging UK outlook
  • Our thoughts on ESG

We doubt Paul McCartney was thinking too much of the economic outlook when he penned the above classic in 1969 but it seems to us that it encapsulates our thoughts on the long-term global outlook rather well.

With all the gloom and despondency that currently prevails, it is easy to forget that we are heading somewhere, and although that journey will certainly include many bumps along the road, history tells us that the outcome will be a positive one. There will be a result in the US election, Brexit will occur, the UK will adapt, and there will be a solution to the Covid-19 crisis. Timing is impossible to predict but we firmly believe that the general economic backdrop will be one of low interest rates, low inflation, and low growth for at least the next five years and probably longer.

Once the current phase of massive monetary and fiscal expansion comes to an end, which it has to, the lack of a strong and rising tide which has carried all ships for the past decade, will mean real growth will become rare and precious and will be highly coveted. It will be the responsibility of any investment manager to hunt out companies whose franchises enable either high growth or lower but more consistent progression. In these type of markets mistakes will be severely punished, so a sound understanding of each investment in any portfolio is crucial.

We stopped trying to second guess the science regarding Covid-19 some time ago, but our fears on the inability of the majority of governments to devise and implement cohesive policies to combat the virus have unfortunately proven correct. We maintain our view that regardless of whether a “cure” is discovered or not, the world’s health systems will find a way to better manage infected individuals and to minimise mortality levels. The most immediate problem for all countries is to decide how much economic pain and collateral medical damage (other disease going untreated) the electorate can tolerate. Unfortunately, these decisions appear to be more politically than altruistically driven in most major economies, although we are unclear whether this actually makes any difference to the short-term outcome. Time will once again be the solution.

The outlook for the UK economy still appears bleak. Regardless of one’s views on the capabilities of the current Government, the UK is faced with a more fragile Covid-19 situation than most, and the prospect of Brexit for which we appear woefully unprepared. Our real concern is the outlook for Sterling which we expect to come under severe pressure as the world starts to come out of Covid-19,  and the markets start to reflect on the relative outlook for individual economies. At present all countries’ balance sheets look unappealing but the pace of recovery and repair will be much faster in other countries. This is not all bad in that overseas earners will benefit, and the UK market has already discounted some of the weakness we anticipate, so there are many cheap companies in the UK. We will continue to identify attractive UK listed opportunities, but many will not be operating in the UK.

As a result of our nervousness on the UK outlook we continue to build on our overweight positions in non-UK markets, driven by their better outlooks and our views on currency. Obviously, many of these opportunities lie in the US but we also see attractive opportunities in Asia, particularly Japan, and also in some Emerging Markets. Although we are not attracted to the European economies, there are still many European listed companies that offer exposure to higher growth parts of the world.

An area which has received a great deal of attention in recent times is Environmental, Social and Governance (“ESG”) which has basically replaced the term ethical as the main title of socially responsible investing. It has in fact greatly widened the areas investors now seek to address: Environmental is the more traditional focus on polluters, climate etc; Social now encompasses gender and racial equality, low pay and a host of other factors; Governance looks at how a company deals with all of these and a number of more subjective strategic issues. In our view any professional investor should be looking at all of these areas already, as part of their assessment of any individual company or sector. Evidence of failing in any of these areas should be a warning sign of deeper-seated problems and should be an integral part of franchise assessment.

Whilst we fully endorse the general principles of ESG, we believe it should form a part of the investment process, not completely dictate it. In our view the latter tends to lead to proxy investing, ie buying a stock because it ticks boxes rather than because of its overall merits. We have witnessed many stocks with poor business models attain ESG star status resulting in stratospherically high share prices, but which usually end in disappointment. We are very happy to construct portfolios with ESG guidelines for clients, but we look first for good companies and then assess their ESG suitability.

Putting our thoughts on ESG investing to one side, we do see major attractions in identifying companies with strong franchises and technologies which will benefit from a huge increase in spending on cleaner energy and general industrial processes. Climate change is finally being addressed on a global scale with the combined forces of popular pressure, capital markets and economic reality meaning it is irreversible. Its major consequence will be the long-term demise of oil as the world’s main energy source, to be replaced by a general electrification powered by natural gas, hydrogen, wind and solar. This will have profound political and economic implications as petrostates decline and democratize, and the developed nations turn their attention to other ways of securing energy sources which will be more technology driven. There are many potential pitfalls along this road. It will be important to maintain pace, but individual countries will need to watch for social unrest as economies adapt. China already controls vast amounts of technology, manufacturing capacity and raw materials which provide the infrastructure for new energy sources, and every other major economy will have to ensure that it has a viable domestic environmental industry. Therein lies the opportunity for investors.

Download the PDF here

 

 

This publication has been produced by Vermeer Investment Management Limited (VIM) trading as Vermeer Partners. It is provided for information purposes only. VIM makes no express or implied warranties and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. VIM will not treat unauthorised recipients of this publication as its clients. Prices shown are indicative and VIM is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. Without limiting any of the foregoing and to the extent permitted by law, in no event shall VIM, nor any of its officers, directors, partners, or employees, have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. Other than disclosures relating to VIM, the information contained in this publication has been obtained from sources that VIM believes to be reliable, but VIM does not represent or warrant that it is accurate or complete. VIM is not responsible for, and makes no warranties whatsoever as to, the content of any third-party website referred to herein or accessed via a hyperlink in this publication and such information is not incorporated by reference. The views in this publication are those of the author(s) and are subject to change. VIM has no obligation to update its opinions or the information in this publication. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the client who receives it. Any securities discussed herein may not be suitable for all investors. VIM recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. This material has been issued and approved for distribution in the UK and European Economic Area by VIM.

©2019 Vermeer Investment Management Limited. All rights reserved. No part of this publication may be reproduced or redistributed in any manner without the prior written permission of VIM. VIM is authorised and regulated by the Financial Conduct Authority (FRN: 710280) and is incorporated in England and Wales (company number: 09081916).

Back to News & Insights

Terms & Conditions

The information and services described on this website are not intended to be used by, or to be available to, persons accessing the website from outside the United Kingdom.

The value of investments and the income derived from them may go down as well as up and you may not receive back all the money which you invest.

The investments and investment services described or recommended on this website may not be suitable for all people.

Any information relating to past performance of an investment or investment service is not a reliable indicator of future performance.

No tax advice is provided and clients will need to seek advice from their independent tax advisor.

Fluctuations in the rate of exchange may have an adverse effect on the value, price or income of non-sterling denominated investments.

Vermeer Investment Management Limited, its associates, employees and/or clients may own or have a position in securities referred to on this website or may have provided advice or investment services in relation to any such security.

The Website is for information purposes only. Information contained on it is not intended to be an offer to buy or sell securities and this website should not be regarded as an offer or solicitation to conduct investment business as defined in section 21 of the UK Financial Services and Markets Act 2000 (FSMA).

Nothing on this website is intended to exclude or restrict any duty or liability which Vermeer Investment Management Limited may have under the FSMA (or any subsequent amending or replacement legislation) or the rules and regulations for the conduct of business made thereunder.

For the purposes of FSMA this website has been approved by Vermeer Investment Management Limited, which is authorized & regulated by the Financial Conduct Authority.

Please read our Privacy Policy. By clicking ‘accept’ you agree to be bound by the terms of this notice.

Accept