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Magazine Issues » May 2020

Post-Covid-19: There’s no going back

U-turnCovid-19 has prompted fund managers to consider how the world will change – perhaps forever – in terms of globalisation and, notably, the response to climate change. By Alex Rolandi.

Industry veterans are used to crises – but there is something about this one that sets it apart from others. Although a market correction seemed to be looming for a while, this one was sparked by something even more intangible than the inner workings of the economy itself: a microscopic pathogen in the same viral family as the common cold – but far more infectious and deadly. 

Faults in the 21st century economic model have been laid bare, on a social and economic level, so much so that a Conservative UK government announced state interventionist policies more akin to a party of the left. Policies do little to hide inequality, however, made all the more evident by this highly contagious and deadlier cousin of the flu. 

As scientists around the world work to better understand the novel coronavirus, and find a vaccine, a return to any sense of normality still seems a long way off. 2020 has so far been a year defined by uncertainty. 

Hannah Skeates, global head of ESG at Wells Fargo Asset Management, tells Funds Europe certain aspects of “business as usual” were already in a state of transition prior to this crisis. “Some significant risks and megatrends and ways of doing business have been discussed at length, and what the current situation does is bring those into stark focus, and makes us consider what we want from business as usual, both immediately and over the weeks and months ahead,” she says. 

Looking beyond the crisis and all the heartache it has wrought, there may be an opportunity to implement positive change in society – in the economic, sustainable and social sense – and asset managers, as well as governments, can play a part in this. 

According to Colin Reedie, co-head of global fixed income at Legal & General Investment Management, a lot of money will initially be spent on ensuring people can continue to sustain themselves if they work in a sector that is not coming back into action any time soon. 

“Longer term, we have a significant inequality issue to address and it may well be, with the fiscal taps, and the QE [quantitative easing] taps turned on, now is the opportunity to deploy a lot of that fiscal ammunition in a way that will start to address that balance,” he says.

“Governments have an opportunity here to think about how they want their societies to look – and there is an opportunity here now to start to shift some of these imbalances.”

Looking forward to the next 12 months or so, a key question for Reedie – who says he never expected the US Federal Reserve to buy high yield bonds before the European Central Bank – is whether the fiscal taps are kept running or not. Either way, he believes the world is not going to be returning to anything that resembles normal over the coming several quarters.

A lot of people will lose their jobs. “How many of these jobs are actually going to come back?” Reedie asks. “And if they don’t, do we have to switch to some form of universal basic income?”

The reason the crisis came about so quickly and severely is “driven largely by the fact that the nature of these particular challenges is outside of the investment community skillset”. Investment managers aren’t, after all, epidemiologists. 

Shifting supply chains
A widely held belief is that Covid-19 will lead to less globalisation in supply chains. Chris Kaminker, head of sustainable investment research and strategy at Lombard Odier Investment Managers (LOIM), expects to see a prolonged shift in supply chains as businesses find new and closer-to-home solutions for critical sourcing.

“An example may be low value-added chemical components, suddenly deemed essential because they are the raw ingredients of basic off-patent drugs. We may see the same trend in food sourcing as we adjust to changing supply levels and face up to the fragility of our existing supply networks,” he tells Funds Europe.

“The automation of industrial processes, warehousing and solving logistics bottlenecks will all undoubtedly accelerate to cope with the new urgencies and are likely to remain a priority for businesses long after the pandemic.”

According to Jamie Jenkins, co-head of the responsible global equities team at BMO Global Asset Management, we are well past the peak of the shift to globalise and locate production to low-cost regions such as Asia or Latin America. 

“Now national populations are going to require their governments to be more in control of their country’s own destiny, and that will require onshoring of production – whether it’s sanitiser, face masks, testing equipment or laboratory networks,” he says. 

However, for Robeco’s global head of fundamental equities and senior portfolio manager for emerging markets, Fabiana Fedeli, more localised supply chains could prove detrimental. “I would argue that the coronavirus will imply more diversification in our supply chains. You don’t want to be tied to one or more suppliers in the same location because if something happens in that location, your whole supply chain is completely distorted,” she argues. 

“Many make the point about globalisation versus localisation. It’s more a matter of the need to diversify, and you need to diversify in terms of supply sources. That can be in terms of companies you supply from and, potentially, geographically.” 

She points out, as an example, that if a company is only getting supplies from Italy, they are going to have a problem. “But if you are a textile company supplying from Italy and from China, next quarter you have a chance to get at least part of the products supplied to you.”

A return to ‘normality’?
As lockdown eases in some countries but not in others, and as the death toll continues to rise, there may be a light at the end of this long, dark tunnel of uncertainty – as long as the world does not backtrack, back to business as usual, nor falter on the promised path toward a sustainable future. But BMO’s Jenkins says it’s going to be very difficult to return to how things were before the pandemic rattled markets worldwide. 

“The particular nature of this current crisis, or recessionary period we’re about to go into, is different. Every time you get a drawdown in markets, every time you get some kind of shock, it tends to be different,” he says. 

“And what’s different about this one, from the financial crisis in ‘08/09, is that first and foremost it’s a public health crisis that is leading into a consumer crisis because of this unparalleled period of government-mandated lockdown. And so it’s a health crisis, it’s a consumption crisis, and by extension, it becomes a financial concern because of the stress on consumer income,” he says.

The consensus is that businesses will be focusing on pure survival in the short term as the crisis continues. “In the medium term, I think it’s going to act as a catalyst for further adoption of progressive ESG behaviours by companies. 

“When we look back at the intensity, this moment of the crisis, we’ll see that those companies that have dealt with it in a very resilient fashion will be those companies that already have a particularly advanced appreciation of the environmental and social, as well as governance risks and opportunities that they’re confronted by,” adds Jenkins. 

The Covid-19 crisis could rebalance the focus towards social issues, and less so on environmental issues that have received much more attention over the past couple of years, he argues. Technology and healthcare will remain key sectors for investment managers looking forward, especially in light of current circumstances.

According to LOIM’s Kaminker: “It is vitally important from an economic standpoint to see a return to productivity at a global scale as quickly as is safely possible. But the degree to which this is a return to ‘business as usual’, as opposed to an entirely new way of functioning, is still debatable.” 

Under pressure
A report by the International Renewable Energy Agency, an Abu Dhabi-headquartered intergovernmental organisation pushing for a transition away from fossil fuels, claims that renewables could lead the way to an economic recovery. The study says increasing investment in renewable energy could drive global GDP growth by almost $100 trillion between now and 2050.

Jeremy Richardson, senior portfolio manager at RBC Global Asset Management, says that this is “quite feasible” and adds: “Sales of traditional internal combustion engine-powered cars were already under pressure before the pandemic, because consumers were responding to the policy actions, carbon taxes and restrictions on when they’d be able to replace their old cars.” 

For Richardson, ESG [environmental, social and governance] won’t be going out of fashion any time soon. “If it’s all about helping investors have a more complete and holistic view – that’s always going to be relevant, even more so now, arguably, than it’s ever been. This won’t, by any stretch, be the high-water mark for ESG, or the death of sustainability.

“None of us have lived through a global pandemic like this ever before, we don’t have a reference to judge it against. If you’ve got a more complete and holistic understanding of the companies that you’re investing in, and you can feel confident about all the extra financial forces, the capital that businesses can draw upon – human capital, communities, societies, the natural world – then you’re in a much better place to be able to build a resilient portfolio that can withstand whatever chance throws at you.” 

Worldwide pollution levels have already dropped to unprecedented lows as countries have implemented lockdowns, with some of the world’s most contaminated cities’ skylines revealing themselves as the smog lifts. 

Rupert Welchman, positive impact fund manager at Union Bancaire Privée, expects green energy to be a major focus and companies involved – and investors – to be the long-term beneficiaries of the current crisis. “One of the most valuable data series produced in the crisis is associated with air pollution. The drop in CO2 and NOx [nitrogen oxides] emissions caused by lower traffic levels is likely to have saved as many lives as have been lost in urban areas with historically high pollution levels,” he says. 

“With air pollution responsible for an estimated 7 million deaths annually, any reduction in mortality rate post-lockdown will provide a very powerful argument for an acceleration towards green energy and away from fossil fuels.” 

According to Kaminker, the crisis offers researchers an “unparalleled” opportunity to study the impact of human behaviour on the environment from a climate science point of view. 

“There is a chance to learn what happens to greenhouse gases in the atmosphere when the world returns to 1950s levels of international transportation,” he says. 

“Will commitments to reduce greenhouse gases be weakened, faced with slowing economies? Or will the experience of lower levels of pollution, including in the emerging world, and an understanding of the positive economic growth impacts of investing in green infrastructure spur more action?”

Hugh Stacey, head of investor solutions at fund administrator IQ-EQ, believes now would be a good time for managers to focus on ESG, in theory. “However, in reality I think that most investors are ramping up their analysis with regard to how the performance of their funds is being affected and how to communicate this to their investors,” he says.

Post-virus rebuild
For Pat Race, partner at Isio, survival has to be the primary focus at present. “Firms clearly have to exist before they can do anything – but there is an argument that a firm’s post-virus rebuild gives them an opportunity to put their ESG credentials at the centre of what they do.”

However, there is a risk that in recovering from the crisis, companies will pay less attention to their carbon emissions, meaning the “excellent” progress made on the response to climate change before the crisis will suffer a setback, according to Race. “Hopefully this will not happen and keeping ESG issues in focus throughout the remainder of the Covid-19 crisis will allow a stronger global business recovery,” he says.

The crisis may not accelerate the already existing trend of sustainable investing, or the trend towards a more sustainable world, according to Robeco’s Fedeli – but she does believe the pandemic has not put a stop to these trends either. “We have noticed that our sustainable strategies – strategies that are very clearly and deliberately investing with sustainability criteria – have actually performed, from a relative standpoint, very well in these markets,” she says.

A study by Fidelity International found a positive correlation between company performance and ESG ratings during the market volatility caused by the virus. Firms with stronger ESG credentials have, on average, outperformed those with weaker ESG ratings, it concluded.

A recent YouGov poll found fewer than one in ten people in the UK want things to return to how they were pre-crisis. “Why wouldn’t a business want to play to that desire and put their ESG credentials in the shop window as soon as they can open up?” Race muses. 

He argues that it would be irresponsible to push for a return to business as usual ahead of scientific and medical recommendations, as it could lead to a second wave of infection requiring another round of lockdown and further economic damage. “Taking both of these into account, there is both a moral and economic rationale not to pressure governments to return to business as usual too quickly.”

For UBP’s Welchman, “there will actually be no return to the normality of life before the global crisis”. 

“As an example, consider the practicalities of travel. Before lockdown the standard concern for a family at an airport was ensuring your valuables and children are safe. Whilst unpleasant, you would not have worried about contracting a serious infectious disease,” he says. 

“This simple observation has multiple ramifications for society and for us as investors, not least in terms of attitudes to airports and other crowded spaces.”

Whatever the future holds, it appears certain that a return to normal may not even closely resemble the normal we all once knew before the pandemic.

© 2020 funds europe