Mike Appleby

Economic changes post COVID-19: the long and short of it

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.

What we have been doing so far

We did not see COVID-19 coming, nor did we imagine the resulting economic shutdown from social distancing as countries try to contain the spread of the virus. From February, we had been closely following what had been happening in China to understand which businesses have exposure to sales, or significant parts of their value chain, in that part of the world.

Our first priority was to check the investment thesis for all the companies we hold to see whether they could survive a lockdown. We used the scenario of a three-month period of little or no activity and then a gradual return to a more normal economic backdrop over 12 months or so. Key questions here included the cash burn rate of a business, how much cash/debt it has and how close it is to borrowing limits. There were a few outliers but the vast majority of the businesses we own look able to withstand this relatively short shock and we therefore made very few changes to our funds.

The second thing we did was ensure we were keeping in contact with clients to let them know what we are doing and we continue to offer webinars and, more generally, make ourselves available.

Next, we checked if the large moves in asset prices represented any investment opportunities. We have a watchlist of companies not in the portfolios where we like all aspects of the business except the valuation (when we looked, they were fully priced). We wanted to see if current conditions represented a buying opportunity. We also analysed how companies in our portfolios had fared in order to reduce those that had held up well and redeploy this money into those we felt had become oversold. We made some changes but only at the margin and there was no wholesale rotation or major changes.

Elsewhere, we decided to suspend our priority engagement activity temporarily while economies are in lockdown, focusing instead on which of our investments are most directly affected by COVID-19. For these companies, we will be engaging on how they are dealing with this crisis, particularly with regard to their staff and supply chains. We are urging companies that can do so to resist the temptation to cut jobs and suppliers quickly, and instead take a more proactive longer-term approach to ensure the business can participate in the recovery when we eventually get through this.

We were fortunate that many of the areas most affected by the pandemic and ensuing lockdown are parts of the market where we have always been structurally underweight, as, bluntly, we had not found any positive sustainability-related trends in these industries. Not holding airlines, cruise ship companies, big oil, diversified miners and many commodity-related businesses meant that while our funds depreciated in value, the market as a whole dropped more – so in relative terms, most of our funds outperformed during the initial phase of this crisis to the end of March.

At some point, however, markets will start looking through this shock to when the economy eventually recovers. Recoveries tend to be led by highly cyclical industries where we have less exposure and were this to happen we would expect our funds to lag, relatively, for a short period.


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

Like everyone across the world, we have also been trying to come to terms with monumental changes to our everyday lives. This has focused our thinking on whether we could see more profound and longer-lasting impacts on the economy and the way people behave, and what implications this might have for investments in our Sustainable Future funds.

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.


Potential longer-term changes (the next decade and beyond)

While too early to be definitive, we do think it is worth spending time trying to understand the longer-term implications of the crisis for the next decade and beyond. Again, we believe this will result in some lasting changes in how society thinks and should ultimately support and accelerate our themes towards an economy that is cleaner, healthier and safer, as well as more equitable.

We would hope to see shifting priorities in certain areas after this outbreak, from realising that a good healthcare system is worthwhile, to remunerating key workers properly and addressing inequality (and removing the ‘low-skilled’ designation), to recognising the value of understanding supply chains and how things get to the shelves.

What has also become very clear is that political agendas can flip when stressed and the shift from austerity to “whatever it takes” suggests at least one of these positions might be wrong. This could mean a massive move in the “Overton Window [1]”, which determines what is acceptable to say, towards a larger state.

Of course, any activity will be constrained to some extent by the debt built up to fund current emergency measures but what politicians decide should ultimately be what society wants and we believe there will be significant shifts in consensus:

  • People will become more risk averse and save more, if they can, and be more discerning in what they buy. Buying more insurance to manage unforeseen shocks could be another result and we would expect to see proactive insurance companies benefit.
  • Banks may regain some of the credibility lost in the global financial crisis. Some will, some won’t.
  • The desire to eat healthier food and exercise will persist.
  • People will continue to demand improvements in local air quality for the health of their families. Links between local air pollution and fatality rates from COVID-19 (even small changes in air quality result in significantly higher fatality rates [2]) will only serve to accelerate this.
  • Efficiency in the use of materials and the desire to make industrial and agricultural improvements will persist. This will also be true for how we manage water and waste.
  • Being forced to work remotely and finding it is a very effective form of communication means people will do this more, saving time and resources.
  • Paying tax is good, dodging tax is bad.
  • People will give up more of their time to help others, either through donations or volunteering.
  • Companies will take a different view of how they run their business and value will be seen in proactively managing staff and supply chain stakeholders. Society is watching how companies react and some brands will take a long time to recover.
  • Demand for quality education will persist.
  • Healthcare systems will be more supported and activity around managing diseases should be bolstered.

Overall, we believe many of the changes coming out of the COVID-19 crisis are about doing things smarter and taking a longer-term view. This is closely linked to the Sustainable Future funds’ investment philosophy and many potential changes are directly aligned with our 20 themes, which means they will accelerate positive trends that are already happening.

What products and services companies provide, as well as how they are managed, will continue to influence their future success. Integrating this knowledge into the core of our investment decision and using it to differentiate between companies, we believe, will be a key ingredient in successfully navigating the investment landscape of the future.


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.

climate change cartoon

Credit: Instagram @statisticallycartoon

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 [3], 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.


[1] The term “Overton Window” was coined in the 1990s and comes from Joseph Overton who worked at the Mackinac Centre for Public Policy, a US conservative think tank in Michigan. This window of ideas that are acceptable to the voting public moves based on public opinion and can move left or right on the political spectrum.

[2] Xiao Wu MS (5 April 2020) Exposure to air pollution and COVID-19 A small increase in long-term exposure to PM2.5 leads to a large increase in COVID-19 death rate, with the magnitude of increase 20 times that observed for PM2.5 and all-cause mortality. The study results underscore the importance of continuing to enforce existing air pollution regulations to protect human health both during and after the COVID-19 crisis. https://projects.iq.harvard.edu/covid-pm:  cited in https://www.theguardian.com/environment/2020/apr/07/air-pollution-linked-to-far-higher-covid-19-death-rates-study-finds

[3] 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.

For a comprehensive list of common financial words and terms, see our glossary here.


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.


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, 12:09 PM