Change for the better

Monday 7th September 2020

In April Phoebe Stone of LGT Vestra kindly presented a live video conference giving her views of the market and also touching on the sustainable investment theme of the portfolios that she manages. The feedback was very positive and Phoebe has kindly agreed to do the same again. It is in place of what would have been our Longleat Seminar which has now been postponed to 29th April next year - Please put the date in your diary.

This is an excellent opportunity to hear live from a leading investment specialist and as the format worked so well last time we would welcome questions from yourselves that we can put to Phoebe. Please email Sarah Preece on sarah@baileycookfp.co.uk with anything you would like to ask and we will do our best to cover these on the call. Sarah can also give you the log in details.

The call, which will last 30 minutes and is scheduled for 10.00 am on Wednesday 23rd September, can be accessed by either phone or live video link using a system called Zoom. It is very easy to use.

What is happening with the markets?

The US stock market index S&P 500 reached an all-time high in mid-August. Who would have thought that in the midst of a pandemic such a thing would be possible? You would think, and not unreasonably, this to be irrational. We are not so sure. Consider the following:

• Equity markets always make their lows when the news is at its darkest. The best example of this was World War Two, when equity markets bottomed out at a time when it was widely believed the UK and its Allies would lose the war. Markets are forward, not current, looking and are judging how the world will look a year from now and are, rightly or wrongly, being optimistic. Better and quicker testing with prospects of a vaccine early not late 2021 give impetus that is often overlooked by the media whose sole objective seems to be negativity.
• The value of many companies has increased as a result of the pandemic. This may seem odd, but some trends in the economy, such as digitisation and sustainability, have accelerated. For companies operating in these areas the pandemic is a positive for their future prospects. In the second quarter of 2020, the worst for lockdown, Apple grew its income by 11%, Amazon by 41% and Thermo Fisher, which provides laboratory equipment to help manage the Covid 19 Crisis, grew at 10%. These growth rates are much better than expected at the start of the year. Indeed we have client businesses with similar stories. So for every cruise line and restaurant that is being negatively impacted, there are much larger companies benefiting
• The returns available in other areas are very low. We know interest rates for our savings are rock bottom and linked to this, in the area of investment, is a Corporate Bond, which is when a Company raises money by issuing a bond in exchange for a rate of interest. Apple issued a 10-year bond in August with an interest rate (coupon) of 1.25%. If that's what a good quality company is offering then it is no surprise many investors find that inadequate for their requirements. At this interest rate it would take you 56 years to double your money. Investors used to require a 8-10% return on their money to be interested in shares when interest rates were about 5%. Now 4-6% returns are attractive - this implies doubling your money in 12-18 years - so investors will pay more to own shares than they did in the past.

Our point is not to say stock markets cannot go down (or up!) from here. The future is always uncertain. It is more to say that having a simple view that markets are overvalued or have gone too far perhaps doesn't reflect some of the structural changes occurring underneath. It would seem to us that after Covid-19 has gone, we will be left with a more valuable, higher returning group of companies to invest in than in the past, and their investment returns will be attractive from current levels. Investing is for the long term and indeed this may take time to come through, but if retail, airlines, restaurants, oil, and tobacco companies are replaced with healthcare, technology, chemistry, renewable energy, engineering and other value added areas in stock markets, paying a higher price for shares would seem quite rational. Maybe that's what the recent market rise is telling us?

What of the future?

This question is perhaps better written as 'what are some of the long-term consequences of Covid 19?'

Some of them are quite clear; an acceleration towards a digital world being perhaps the clearest. Although this trend has been ongoing for a while it has been supercharged by Covid 19. Digital strategies for companies are no longer nice to have, but a mortal risk if they are absent. A couple of examples are useful in this respect:

• In the UK it took 10 years for online retail sales to go from 10% to 20% and 10 weeks for it to go from 20-30%!
• In Q2 Nike made 47% of its sales direct to consumer via the internet, up 75% year on year. They set this a target which they have achieved 5 years early!

Sustainable Investing is the overall title given to investing in businesses that integrate environmental (E), social (S) and governance (G) into their day to day operations. The E and G are perhaps better known however, the other consequence of Covid 19 is the increased awareness of the 'S' in 'ESG'. The Social has been harder to know what it looks like, but is clearer now:

• Covid 19 has been a real test of how companies care for employees and communities. We have seen fierce competitors collaborating to find vaccines, executives taking material pay cuts, and we have seen businesses pivot to producing ventilators and hand sanitiser.
• Arguably those companies which have fallen into deep trouble sweated their assets too hard. Financial (balance sheets), physical (offices, pubs) and human (employees) assets were worked too hard due to a rigid focus on maximising returns for their shareholders. Those companies with a broader stakeholder focus would appear to have come out of this crisis stronger.
• Covid 19 will accelerate that the role of companies is not solely to maximise shareholders returns, but to care for, nurture and maximise returns for all stakeholders, of which shareholders are one (employees, customers, the environment being examples of others). This idea is one that is at the heart of Sustainable investing, that a broad focus on stakeholders vs a singular focus on shareholders will actually result in a better outcome for both society and shareholders. We suspect the current crisis will cement this view.

This last point is one that rings true for us. When we set up the business one of the key initial bits of advice we had was to agree our values in business and write them down. It took us a couple of days and was one of the most worthwhile exercises we did as It made us think of what we wanted to achieve for our clients, staff, providers and ourselves, all of which we knew were so interdependent on the others. Those values remain at the heart of Bailey Cook Financial Planning.

We have had a number of questions asking when the Autumn budget will take place and as yet there has not been a date set. As the UK debt level surpassed £2 trillion there has been a focus on how Rishi Sunak will raise money. We wonder if his "blunder" on Wednesday revealing there would "not be a horror show of tax rises" was clever stage management on his part to allay fears. Next week we will focus on Capital Gains Tax and possible changes so you are aware of the issues.

Please send your questions for Phoebe to Sarah and we look forward to joining our call on Wednesday 23rd September.