Investment 2021: prospects and pitfalls in a post-pandemic world

A global economic bounceback, opportunities in green energy, good value in post-Brexit Britain and even the chance to make money on big oil: all this and more is on offer for investors looking for profit in 2021.

That’s the view of five investment experts brought together this week by FT Money to pick out some of their most promising ideas for the next 12 months — and air some of their concerns about what might go wrong as the world struggles to overcome the Covid-19 pandemic.

“What will be the pace of the recovery?” says Simon Webber, a global equities fund manager at Schroders. “Surprisingly fast, if I had to bet on it. I think that, rightly, there is a lot of caution. A lot of people in service sectors have lost their jobs. But there is also a lot of pent-up demand.”

Or, as Merryn Somerset Webb, the FT Money columnist, puts it: “You only have to look at the high street now and the newspapers are jammed full of whiny, complaining articles about people going out and queueing outside the shops without face masks.

“We should look at that and go, ‘Well, maybe they should wear a mask’, but we should also say, ‘Look how much people want to get back to normal’.”

Mr Webber and Ms Somerset Webb joined FT Money on a panel which included two other top fund managers — Helen Xiong, a partner specialising in global equities at Baillie Gifford, and Alexander Wright, a value-focused fund manager at Fidelity — plus Chris Giles, the FT’s economics editor.

Unlike past years, when the participants talked over a convivial lunch at the FT’s headquarters, this time we held a virtual gathering from different corners of the UK — Ms Somerset Webb and Ms Xiong from Edinburgh, Mr Webber from Suffolk, Mr Wright from Essex, and Chris and I from north London. Despite the odd fuzzy connection, the panellists ably tackled my questions and provided some valuable clues as to what investors might expect from the markets in the coming year.

Alexander Wright, fund manager, Fidelity

‘While 2021 may be a very good year for global economic growth, it may actually be a reasonably mediocre year or even poor year for global equity market returns’

What’s the outlook for 2021?

“I think people may well be surprised with the speed of the snapback in global economies and GDP because you’ve already seen a surprisingly strong second half of 2020,” says Fidelity’s Mr Wright, broadly agreeing with the bullish views of Mr Webber and Ms Somerset Webb.

Unlike in normal recessions, where consumers’ savings drop and debts often increase, household balance sheets are “in really good shape”, says Mr Wright, putting people in a strong position to start spending quickly and pushing the recovery.

However, Mr Wright has disappointing news for stock investors, saying that global equity markets may have already anticipated this economic rebound. “I think another surprise that you may well see, given how strongly stock markets have done and how high valuations are, is that while 2021 may be a very good year for global economic growth, it may actually be a reasonably mediocre year or even poor year for global equity market returns. You may have to be a lot more discerning in terms of what you invest in to achieve positive returns.”

Introducing himself as Mr Misery Guts, Mr Giles gives a far less rosy view of the next 12 months. He says: “We’re certainly not going to make a full recovery, so we’re not going to be in a position at the end of 2021 where we can say it was a one-off shock and we’re back to where we thought we would be. There will be a certain amount of scarring from the pandemic.”

For the UK, the Office for Budget Responsibility forecasts an 11.3 per cent GDP plunge for this year followed by growth of 5.5 per cent in 2021.

Mr Giles thinks that even if developed countries roll out the vaccine rapidly, much of the world’s 7.8bn population will not be vaccinated next year, so there will be Covid-19 outbreaks triggering new rounds of economic and social restrictions.

On top of this, Mr Giles says, companies have taken on “an enormous amount of additional debt”, while businesses in hard-hit sectors, including transport, bricks-and-mortar retail, and hospitality, have closed and jobs have been lost that will not come back “suddenly, overnight”.

In a disarmingly refreshing comment, Ms Xiong says that she has “no idea” of the outlook for 2021, even if “there is no shortage of people trying to guess what the GDP is going to be for the next year”. Working for a fund management company with a 10-year investment horizon, she thinks that long-term changes — notably technology shifts — are far more important to investment outcomes than short-term developments, including even the pandemic. So pick stocks carefully and stick with them.

Merryn Somerset Webb, FT Money columnist

‘In the fragile sectors, we’ll have seen a lot of people go to the wall, which is terrible. But the companies which survive will be operating in a much better environment’

As well as causing havoc, will the pandemic create investment opportunities?

Yes, say the panellists, pointing to technological, social and medical changes, as well as the explosion in online commerce.

Ms Xiong says that the pandemic is having an effect in “definitely accelerating” the shift to digital technologies. Having transformed the media, communications and ecommerce sectors in the past two decades, it is now reshaping office environments, education and healthcare.

Mr Webber adds: “All sorts of businesses that have had to operate for nine months as remotely as possible have realised they can do it.” He cites financial services as an example — a sector which happens to be easily accessible to private investors.

Mr Wright goes for retail, arguing that 10 years of movement from bricks-and-mortar to online has taken place “instantly”, taking some companies out of business while creating opportunities for the survivors, with lower costs and fewer competitors. “It really has been winner takes all, if you are the dominant retailer in your sector.”

He says that productivity “is definitely going to be higher . . . so I think profit margins across the board could surprise positively.” Ms Somerset Webb agrees: “In the fragile sectors, we’ll have seen a lot of people go to the wall, which is terrible. But the companies which survive will be operating in a much better environment.”

Will the pandemic accelerate the green energy revolution?

Again yes, say the panellists. Ms Xiong says: “I think that the most enduring impact of the pandemic would be the end of the carbon era . . . We are reaching the point where energy from renewable sources is cheaper than carbon-based sources and electric vehicles are better than cars with internal combustion engines.”

Mr Webber agrees, saying that the pandemic has made people realise the importance of global problems requiring a global approach — and a common focus in public spending. “You’re seeing this alignment of the need to invest and stimulus programmes with environmental objectives.”

But Mr Giles — once more — sounds a note of caution. While paying credit to the good news in environmental policymaking, including the UK government’s recent tough emissions pledge, he warns that the pandemic has made it “more difficult” to pursue climate change goals because of the huge financial resources it has swallowed and debts it has imposed.

Also, far from promoting global co-operation, the Covid-19 response has largely seen countries fending for themselves, he says, suggesting that this a poor base for strengthening co-ordinated action on climate change.

Ms Somerset Webb too is a touch sceptical, saying that governments are seizing on green policies as “an excuse to have massive fiscal spending going into next year and the year after . . . probably linked to unachievable targets”.

For good measure, she adds that many green investments are now “quite highly priced”. A little provocatively, she suggests that the ordinary investor, with “no environmental targets”, might “happily buy into big oil”. They could take the dividends for the next 10 years and hope for another oil “mini-shock” to boost crude prices, especially as little investment is now going into developing supplies.

Will ultra-cheap money create inflation risks?

Yes, definitely, say our experts, but perhaps not immediately. Mr Wright says there is “extremely low political will” to repay the huge public debt accumulated in the pandemic through austerity, public spending cuts or large tax increases.

Potentially, governments could repeat the policies of the years after the second world war, when interest rates were kept low to allow war debts to be serviced and permit inflation to rise and cut the real value of the borrowings, he says. “It isn’t a negative for actual asset prices but it’s a negative for real asset prices, as inflation just eats away your returns.”

Mr Wright adds that it may “take quite a while” for inflation to re-emerge given the way that globalisation and technology have been pushing down prices. But the outlook for equities is clouded. “Because of that inflation, the real returns from equities are likely to be a lot worse than they’ve been over the past 10 years.”

Simon Webber, fund manager, Schroders

‘We are finding more well-run UK businesses that look undervalued. I think there is something to be said for the argument that the UK has been overlooked’

Is the UK market a good or a bad bet right now?

Here the panellists are divided. Mr Wright, who specialises in the UK, says this is the time to buy British stocks because the UK market has missed out on the equities boom of the past decade, partly because it is weighted towards old-established global companies which did not see much of the tech boom. The price/earnings ratio in the UK is under 15, versus 22 for the US market.

Mr Wright says: “In an era when discount rates start to rise because of inflation you want to be in the cheaper companies and, in my opinion, the UK is the best-value market globally.”

But Ms Xiong, the global specialist, has serious reservations about the UK’s entrepreneurial capacity to create the kind of world-beating companies that, over time, account for almost all stock market gains. In the US, for example, a study showed that over 90 years just 4 per cent of 26,000 listed companies generated “all the wealth creation”. So the priority in investment is not picking markets but choosing exceptional companies.

“I’ve not seen the UK come up with a world-class company to challenge the likes that we see coming out of the west coast of America or the east coast of China,” says Ms Xiong. “The last one was probably Arm Technologies [the chip designer bought by Japan’s SoftBank].”

Mr Webber concedes that Ms Xiong has a point. “With the odd exception, we haven’t produced the calibre of growth companies that we should have done.” But he adds: “We are finding more well-run UK businesses that look undervalued. I think there is something to be said for the argument that the UK has been overlooked.” He cites, as examples of British technology leadership, companies in hydrogen and fuel cells.

Chris Giles, FT economics editor

‘The big threat about Brexit is whether it makes the UK a less attractive place for investors in the long term? And I still think it does’

Is Brexit still a cloud over UK stocks?

Yes and no. Mr Giles says that despite the huge focus on the end of the transition out of the EU on January 1, the expected disruption will not be a huge issue for the economy because it is likely to be temporary. “The big threat about Brexit is whether it makes the UK a less attractive place for investors in the long term? And I still think it does, in the long term.”

Ms Somerset Webb says investors will return to the UK once the uncertainty generated by the transition and the trade negotiations between London and Brussels is over. “They just want it resolved. I suspect that the foreign investors will come back to the UK.”

Mr Webber agrees. “The financial markets have gone from obsession over Brexit to apathy and just want things settled. I think businesses will, at this point, get to grips with the arrangements that are being put in place and move on.”

Will the global tech and green stock boom last?

Panellists have different views on this complex question. Mr Wright argues that the benign financial conditions which helped fuel the surge in tech and green shares may prove unsustainable if inflation re-emerges.

But Ms Xiong argues that existing valuation models such as price/earnings ratios used to price traditional companies do not apply fully to tech companies, which don’t face the same physical constraints as older businesses. For example, retailers such as Walmart and Tesco face barriers in acquiring land and other resources to grow. These barriers do not apply to the same degree to the likes of Amazon or Netflix, which can therefore become global players much faster. “The opportunities we’re seeing with these companies, as well as the returns we think we will see, are totally different in magnitude to what we have seen before.”

Mr Webber warns that new regulations, including tax rules, may be on the way, which could affect the tech giants. “Clearly the taxation base of western economies is not set up to deal with where value is being created in the technology businesses. I think this is something that needs to be addressed over time given the increasing unfairness that you are seeing in terms of who is paying tax.”

But he argues that as far as the green energy revolution is concerned, there is still huge room for growth — and for investment gains. “There may be high valuations today, but for the winners there can still be some real value creation.”

Helen Xiong, partner, Baillie Gifford

‘What I find exciting is that the shift towards adopting ESG is driven by the changing attitudes of consumers and entrepreneurs’

Will the ESG agenda have more impact on investment?

Yes, say the panellists. Ms Xiong says: “What I find exciting is that the shift towards adopting ESG [environmental, social and governance standards] is driven by the changing attitudes of consumers and entrepreneurs”. They are pushing the financial community into action, she says.

She adds that the traditional division between for-profit companies and not-for-profit groups is ending. “We’ve seen in the past decade there doesn’t need to be a trade-off, that more companies are for-profit but also have a social purpose and the profit makes them more sustainable as businesses.”

Ms Xiong argues that finance executives tend to focus on the G of ESG because governance questions are measurable, for example in diversity hiring. “But what really matters to society is E.”

Mr Wright adds that the pandemic has also highlighted the importance of S — social concerns. Companies have been judged on how they treat their employees and wider communities. And this has a financial value — enhancing a brand in ways which ultimately drive sales and profits.

So, even in the midst of the deepest global recession since the second world war, our experts are focused on finding alpha. They may be cautious; they may be uncertain. But in China and the US, and even in Brexit Britain, they see opportunities.

Letter in response to this article:

Even in Cardigan Bay the wind does not always blow / From Lyn Jenkins, Cardigan Island Coastal Farm Park Cardigan, Ceredigion, UK