Mike Appleby

Economic changes post COVID-19

Mike Appleby

COVID-19 has been a shock to all of us, as well as to the system; the priority now is to get through it with minimal loss of life and damage to the economy.

The crisis is terrible but the response shows just how we can overcome this challenge through co-operation, applying ingenuity to positive ends and investing in businesses to deliver a positive impact. There are stark parallels with how we have to deal with the challenges of the climate emergency, loss of biodiversity on land and sea, and sharing prosperity more widely and more fairly.

 

We believe that, after we have suppressed this pandemic, we will intensify our response to these challenges, underpinning longer term sustainable trends.

 

Short-term impacts to our economy (the next year or so)

We think about the future of the global economy in terms of major long-term trends, and we have identified 20 themes in which we want to invest: the ultimate impact of these is to make our world cleaner, healthier and safer. While COVID-19 and its fallout will have short-term impacts on many of these themes, both positive and negative, we feel they will be all the more relevant longer term as the economy recovers.

Connecting people: If anyone was unsure what this trend was about, they certainly understand it now. This theme looks at how we can be better connected through the infrastructure that helps us communicate and the service providers we use to do this: think about mobile tower networks and internet, data and voice providers. Companies exposed to this theme have performed well amid recent weakness, as have those within Increasing cyber security as remote working and the need to protect end users increases.

Consumption and behavioural changes: While slowing the spread of the virus, lockdowns have had a negative impact on consumer-facing businesses (travel, dining/going out, collective pursuits, non-essential bricks and mortar retail). For our Enabling healthier lifestyles theme, which promotes exercise through affordable gyms and gym equipment, social distancing has hit businesses hard but we are confident demand will come back quickly post-lockdown, with people potentially even keener to get fit.

Our Making transport more efficient theme, through a modal shift away from driving cars to safer and more efficient public transport (trains and buses), has also taken a hit as these services have all but shut down but, again, we feel this is temporary.

Moving finally to our themes focused on improving quality of life through Enabling innovation in healthcare and Providing affordable healthcare, these have benefited from the broad focus on who can solve this crisis and come up with an effective treatment. It is interesting to note, however, that given the high profile of COVID-19, any eventual vaccine or treatment will likely be delivered at very low margin or close to cost – no one wants to be seen to profiteer from the crisis. Our healthcare specialist Laurie Don has written an article about how many of the healthcare companies we own are contributing to the fight against COVID-19.

Beyond COVID-19

If the current crisis has taught us anything, it is that we need to face challenges head on and not bury our heads in the sand and hope they go away – and so it is with the climate crisis.

Some climate-related initiatives, such as parts of the EU Green Deal and the climate crisis meeting COP26, have been delayed a year as COVID-19, rightly, stays at the top of the agenda. But we think this de-emphasis will be temporary.

Let’s look at a measure of economic activity: GDP. If we assume COVID-19 results in a 2.5% hit to annual GDP for each month an economy is in lockdown and assume a two-month lockdown, the reduction in economic activity is equivalent to 5% GDP drop in one year, which is clearly a big number.

The estimated costs resulting from climate change, measured as a reduction in GDP*, vary depending on the country. In the UK, the costs are estimated to be in the order of a -0.4% hit to GDP every year for over 50 years and in the US the figure is -0.6%. These are not distributed normally, with countries near the Equator like Central America at -11% and Western Africa at -15%.

I am in no way trying to denigrate the COVID-19 crisis: it is having a devastating impact on families who have lost loved ones, and people whose government has not been able to stand behind them and consequently lost their jobs and livelihoods. But the negative impact of not acting on climate change is huge: it dwarfs the economic impacts we are beginning to understand will happen as a result of COVID-19 and we cannot afford to go back to normal when this crisis is over. We should feel emboldened by our collective efforts and go further to make our economy much cleaner, healthier and safer as well as striving to make it fairer.

 

*The Effects of Climate Change on GDP by Country and the Global Economic Gains From Complying With the Paris Climate Accord  (Kompas et al) Jul-2018 https://agupubs.onlinelibrary.wiley.com/doi/full/10.1029/2018EF000922. Table 1: Impacts of global warming Impacts of global warming 3 degree warming scenario (optimistic as current targets are likely nearer 4 degrees warming). % GDP per year to 2100.

 

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Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The majority of the Liontrust Sustainable Future Funds have holdings which are denominated in currencies other than Sterling and may be affected by movements in exchange rates. Some of these funds invest in emerging markets which may involve a higher element of risk due to less well-regulated markets and political and economic instability. Consequently the value of an investment may rise or fall in line with the exchange rates. Liontrust UK Ethical Fund, Liontrust SF European Growth Fund and Liontrust SF UK Growth Fund invest geographically in a narrow range and has a concentrated portfolio of securities, there is an increased risk of volatility which may result in frequent rises and falls in the Fund’s share price. Liontrust SF Managed Fund, Liontrust SF Corporate Bond Fund, Liontrust SF Cautious Managed Fund, Liontrust SF Defensive Managed Fund and Liontrust Monthly Income Bond Fund invest in bonds and other fixed-interest securities - fluctuations in interest rates are likely to affect the value of these financial instruments. If long-term interest rates rise, the value of your shares is likely to fall. If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds. This is because there is low trading activity in the markets for many of the bonds held by these funds. Mentioned above five funds can also invest in derivatives. Derivatives are used to protect against currencies, credit and interests rates move or for investment purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Wednesday, April 22, 2020, 10:46 AM