The Great Instability
- The post-Covid transition
The rollout of safe and effective vaccines for Covid-19 is a gamechanger for 2021, bringing huge relief for markets and optimism about the path of economic recovery. But there are still a lot of unknowns. Firstly, about the rollout of the vaccination process itself, but also about how economies will reopen, will global movement resume and have central banks and governments done enough? Investors – and humankind as a whole – may need to learn to live with this heightened uncertainty hanging over economies and markets for some time.
The period before the pandemic was characterised as one of low-flation, where unemployment in the US, the UK and Europe remained low, but inflation didn’t materialise. Some believe that scenario is about to change, particularly given the extraordinary fiscal stimulus prompted by the Covid-19 crisis. On one hand, an enormous acceleration in spending as lockdowns are eased could cause economies to overheat and inflation to rise. Or inflation could remain stubbornly low.
This inflation conundrum is expected to repeatedly unsettle markets as we exit the crisis, meaning the road ahead for investors could be bumpy.
China is now too big to ignore and investors need to take notice as China is set to become a dominant driver of the global economy. On top of that, China’s economic policies tend to be more persistent and strategic that those of other large global powers, meaning it is possible for investors to get to grips with those policies and position accordingly.
China’s ‘dual circulation’ economic strategy aims to rebalance consumption and production internally to reduce its reliance on overseas markets, benefitting sectors such as healthcare, insurance and consumer discretionary; it also aims to retain a place on the global stage through innovation and pushing Chinese companies up the value chain.
Ageing and increasingly unhealthy populations have been fuelling demand for the healthcare sector. Innovation has added to this by creating new markets for previously untreatable conditions. At the same time, supply-side challenges are being met by new technologies creating efficiencies and improvements in product offerings. Covid-19 has also forced rapid and widespread innovation, most notably in the production and approvals of antivirals and vaccines.
Technology-driven disruption is nothing new, but the lack of provisions to provide any cushion against disruption has become a major facet of the Great Instability. The perception of living through a permanent state of tech-driven change is weighing heavily on workers, widening inequalities and steering disgruntled voters towards populist governments.
For investors, it is vital to consider both the scope of the disruption and the policies changes that might lie ahead in order to position portfolios on the right side of that shift. Which industries are facing disruption and which aren’t? Will there be future obstacles? Will superstar companies be allowed to dominate going forward?
- Energy transition
Energy will play a key role in the journey to net-zero, energy, given it is responsible for almost three quarters of global emissions. Reducing consumption and increasing energy efficiency will be important; however, it won’t be enough.
To accelerate the shift to renewables, we will need further innovation in technologies such as long-duration battery storage. In addition, low-carbon electricity will need to penetrate more sectors through electrification. And for those areas that cannot be electrified, other technology will be needed, such as hydrogen or capturing carbon emissions.
- Environmental sustainability
The pandemic provided a reminder of the urgent need to invest in restoring the world’s ecosystems. According to the World Economic Forum, halting biodiversity loss will require a fundamental transformation across three socio-economic systems – food, land and ocean use; infrastructure and the built environment; extractives and energy.
We have a significant opportunity and responsibility to reverse nature loss and there are potential benefits to be gained by embracing this transformation quickly. For investors, we see diverse opportunities from companies innovating in land-based, marine and urban ecosystem repair and improvement.
- Equality and inclusive growth
2020 was a year when issues around equality became supercharged. The social disparities highlighted by the pandemic were revealing – key workers overwhelmingly come from lower-income households, while people from ethnic minority backgrounds faced a greater health risk from the virus. Racial injustice was also thrust into the spotlight after George Floyd’s death.
While companies in numerous sectors pledged action to boost corporate diversity, transparency around this issue remains low. Yet, these topics are moving to the forefront of investors’ minds and companies will need to do better.
To read Richard Barwell’s assessment of these mega trends in more detail, please click here to access the white paper in full.