Dot Thought - 2021.
2021 will be a year of renewed hope for human health and economic growth, but much will depend on the speed and effectiveness of the Covid-19 vaccines. Expect a gradual easing of local and international business and travel restrictions late in the first half of the year and a gradual return to international travel in the second half. Along with that investors should expect that last year’s underperforming sectors may be in for a rebound: airlines, hospitality, oil & gas (production and services) were the worst performing sectors in 2020. As industries, investments in some of these may be counter to the most stringent ESG criteria but there is always an opportunity to invest in individual companies within particular industries that are leading their peers in pursuing ESG best-practices and thereby honour one’s ESG commitments as well as profit from a rebound.
If there is one certainty in 2021, its that ESG and climate change will remain at the forefront of investors’ thinking and action. In major parts of the world, regulations and governance best practice now require pension schemes and corporate boards alike to set out their policies and objectives with respect to ESG considerations, thus ensuring that important global issues such as climate change, poverty, health, education, diversity and equality continue to get the attention they deserve.
1. Climate Change: China’s pledge and the US to re-join the Paris Agreement under Joe Biden
One of the more obvious climate impact events of 2021 will be the US re-signing the Paris climate accord under President-elect Joe Biden. The US re-signing the Agreement is an important signal to the world and will likely result in US federal investment dollars being made available to environmental programs. Biden has already pledged US $2 trillion in climate-related spending on infrastructure and job creation through the manufacture and adoption of renewable energy with the aim of achieving carbon neutrality in the US by 2050.
Quietly and with little fanfare, Chinese President Xi Jinping announced in a speech to the UN General Assembly in late September 2020 that China would cut emissions to net zero by 2060. China is already the world’s largest manufacturer of solar and wind technologies, electric vehicles and battery storage; China’s leading positions in these sectors will only profit from world’s push to reduce carbon emissions. To achieve its ambitious net zero goal by 2060, China will need to make significant investments in decarbonization in the years ahead.
With China, the Europe Union and the US (under Joe Biden) all pledging to combat climate change and decarbonise their economies, this megatrend is set to last for decades.
2. Inflation: real estate, gold and cryptocurrencies
As we noted in our 2020 year-in-review paper, the unprecedented level of monetary easing (a.k.a. money printing) undertaken by world central banks last year in response to the Q2 collapse in GDP had a big and immediate positive impact on global markets. However, the medium- to longer-term impact of this intervention, in addition to the effects of fiscal measures (government tax and spending policies), are less well known. Typically, central bank and government policy measures targeted to increase economic growth and induce consumer spending ultimately have an inflationary effect, which causes the value of money to decline. When the value of money is expected to decline investors often seek assets that have historically preserved their value in the face of inflation. Another potential contributor to inflation are the nationalist trends towards de-globalisation (such as Brexit), with the re-imposition of tariffs and trade barriers aimed at preserving and creating native jobs having the adverse effect of increasing the prices of imported goods and raw materials.
Physical assets such as real estate and gold have proven over long periods of time to increase in value along with rising inflation, thus serving to preserve investors’ wealth. As a result, we expect interest in real estate to be strong in 2021, albeit with demand varying by sector. Commercial real estate sectors that align with the existing trends towards online shopping (logistics/warehouses, digital infrastructure, for example) and mobile/flexible working should benefit from new investment. We also expect investment in the office sector as traditional workspaces are transformed to align with more flexible working options for office-based employees.
Gold and “digital gold” cryptocurrencies such as Bitcoin and Ethereum may also benefit from concerns over inflation, with older generations preferring the sanctity of the yellow metal versus the willingness of younger investors to preserve value in “bits and bytes”. The appeal of both real and virtual gold is their independence from manipulation and limited supply. Big governments have presided over unprecedented central bank money-printing twice in the past dozen years, doing so to prop up asset prices and enable debts to be repaid with cheap money, thereby protecting consumers, businesses and voters in the short-term. But the price of printing money has always been asset price inflation, as more money flowing through the economic system ultimately pushes prices higher over the medium- to long-term. And while a little inflation is viewed as good (1-2% every year), too much is very bad, particularly for individuals on fixed incomes and those without material assets such as their own homes. So instead of holding traditional currencies like GBP, USD and EUR that can be printed at the insistence of politicians (and thereby devalued), investors may turn instead to gold and cryptocurrencies.
3. Credit: flexible solutions to address stressed and distressed situations
Although many global stock indices were up in 2020 and credit appeared resilient (as measured by credit spreads), the reality in the real economy was very different. Businesses are closing at an alarming rate while others are holding on by a thread as Covid-restrictions and established trends like e-commerce take a particularly heavy toll on traditional industry. This pain is despite government policy interventions such as employee furlough plans, mandated rent reductions and eviction moratoriums, as well as tax reductions and payment deferrals. There simply is not enough capital from government and traditional lenders available efficiently and on the right terms. This is where the flexibility and efficiency of alternative lenders can really deliver relief and benefits to business.
Credit managers that bring a range of lending and industry expertise and flexible capital solutions (from floating rate loans to fixed rate debt, asset-backed loans to securitizations) will see significant investor interest in 2021. Managers with expertise of working with and lending to businesses in distress or those that have already defaulted on loan and debt payments will also see high demand from investors.
2021 has the potential to be a very exciting year of better health and economic outcomes all over the world. But we should not expect a smooth ride even as Covid-19 vaccination programmes are rolled out around the world. We have already felt the chilling effects of new Covid restrictions in the UK, enacted after two new variants of the coronavirus were discovered. More businesses will close and more jobs will be lost before we will be free to return to normal. As ever, it is critical that investors have a well-diversified portfolio of assets that reflects a balance of risks and provides for positive outcomes under different economic scenarios.