A View from
the Midst of
the Pandemic

I started writing this piece in the early part of 2020, actually on return from my most recent trip in January to China where, as usual, I was blown away by the combination of the innovation and growth opportunities presented to us as investment opportunities. At the time, the picture of a bad flu outbreak in Wuhan (a region I previously only associated with China’s fresh fruit and vegetable industry) was starting to emerge but I don’t think anyone would have thought that by March over a billion people around the world would be effectively contained in their own abodes as every polity attempted to contain the spread of the already notorious Covid-19 virus. It is clearly far too early to draw long-term conclusions from a disease which we are still starting to understand, let alone conquer. However, I have found it consuming much of my thought in terms of trying to look out over the next decade, and want to offer some ruminations on areas which the pandemic has stimulated me to think about.

A renaissance in maths!

We have talked for years about exponential change, fat tails, black swans and the like. This has been based on both their import to long-term investing and the contention that they are far more common than the reversion to the mean mantra (which I have critiqued in previous pieces) would have us acknowledge. I wonder if the daily exposure to the maths of exponential change through the need for social distancing to reduce transmission factors will have a long-lasting effect. The term ‘going viral’ has been commonly used in the 21st century vernacular to refer to social media posts, YouTube videos and the like, but I think this was often just a figure of speech without a true understanding of how a virus can operate and spread at almost incomprehensible rates when left unchecked. Clearly, lots of people haven’t yet grasped the true meaning of viral load when it impinges on their perceived freedoms, from the stubborn Australian beach surfers to UK day trippers to Americans protesting their fundamental liberties in large groups, but I do think that the general appreciation of the power (good and bad) of exponential change will emerge from the pandemic at a heightened level.

The Risk in the Index…

One other nascent feature of the pandemic in stock market terms has been a further illustration of our much repeated mantra that the index contains fundamental risk. The notion that equity indices are somehow risk-free states has to my mind always been a dangerous fallacy which has been amplified by the rise of passive investing. Actually, all three of the significant market crises which my career has contained – technology, media and telecoms (TMT), the financial crisis and now the coronavirus – have been linked by so much damage being done to particular parts of the index that it demolishes the thesis that index investing can diversify away such risk.

In the current iteration, the demand shock to many parts of economies has exposed risk in supposedly ‘robust’ areas and large index constituents. This is most obvious in the collapse of traditional extractive energy which simply cannot store the resources being produced and therefore only has the safety valve of falling prices. But it is also present in second order ways – those companies which prided themselves on resisting the move to sell goods online – such as Primark in the UK’s fast fashion sector – suddenly look very risky at a time when their customers cannot travel to their deserted retail temples. Of course, some of this is short term in nature but it would appear to me likely to accelerate many of the trends already in place in terms of different ways of consuming, and enhance the economics of the disruptors.

There is a second huge challenge presented to market orthodoxy in the form of the disappearance of apparently safe dividends. It is hard to escape the symbolism of Royal Dutch Shell cutting its dividend for the first time in 80 years and the reaction of how devastating this is to those who ‘relied’ on such dividends as providing superior returns to cash. There are several elements to this. The first is that there is an immediate shock to valuations which relied on dividend growth models and a challenge to the future reliance on dividends, especially as many of those which have been cancelled had already been agreed to be paid. There would seem to me to be a further impediment to the difficult task that value managers have of assessing intrinsic value with one of the tools in their toolbox being severely impaired. At the time of writing, estimates are that 2020 dividend income globally will decline by 25–40 per cent and even these figures could prove conservative. Many of the fabled dividend payers with consistent and growing dividend streams have lost their halos. It is worth saying that this is the right decision for companies whose revenues and cash flows have evaporated but that doesn’t lessen the potential impact. Of course, there will be some recovery in pay-out ratios and growth in future dividends, but it seems to me that 2020 will be seen as an epochal moment when the relative import to shareholders of long-term revenue and earnings growth became amplified against the diminished security of dividends.

There will be many other industries and areas of activity where fundamental changes are likely to occur over the next decade and beyond, but none seems more likely than the sphere of healthcare. Perhaps the most widespread commonality between all nations during the last couple of months has been the global wave of gratitude toward all those involved at the front line of hospitals in dealing with the virus. From our local UK fundraising hero, Captain Tom, to the global hand-clapping of healthcare workers which started in Spain; from the impromptu operas of Italian town houses to the micro efforts to manufacture PPE – seldom can a global community have had such a united attitude toward a sector of their economies.

Of course, healthcare has always possessed the qualities of a public good and, in my experience, this has led it to behave differently when it comes to the quoted stock market. Indeed, much of the debate surrounding its outsize proportion of the US economy stems from that society’s evolution of a public good as a primarily private enterprise. The challenges of dealing with the ageing populations of many societies and the trade-offs inevitably involved in deciding how much of the public purse should be directed toward healthcare will not diminish, but my sense is that both politicians and the public may well have a different answer to some of these conundrums going forward, whether it be toward public sector wages or investment in facilities. The US will remain a law unto itself, but no-one could have foreseen 30 million new jobless claims in little more than a month and the concomitant chaos of almost one-tenth of the population dropping out of the insurance system. This seems likely to have consequences for any future debates on Medicare and to my mind again raises the spectre of some form of price controls or, at least, increased government intervention. These are huge political questions which are likely to continue to exert a large influence over companies involved in this area.

As unemployment claims continue to increase in New York City, the lines for free food continue to grow.
© Getty Images North America.

Some of the consequences of the crisis are easier to predict – research budgets into virology are surely destined to be sustained at much higher levels, but there are already worries emerging on the decline of prevention in second order health services, such as dentistry or ophthalmology. The most success in the healthcare area over the last decade or so has been in companies which innovate and take costs out of the system, whether that be Intuitive’s robots or Illumina’s sequencers. While we are interested in the science of a vaccine, it may well be that more rewarding paths of research revolve around telemedicine or remote diagnosis and dispensing of drugs.

The paradox of ‘The Other’ – global dependency vs nationalism

If one can be cheered by the commonality of the appreciation of health professionals, it is hard to be anything other than depressed by the retreat behind national boundaries of societies in dealing with the spread of the virus. My doctorate before joining Baillie Gifford focused on the topic of nationalism, and the definition of that phenomenon which I always found most salient was that proposed by the Czech philosopher, Ernest Gellner. This was that nations were defined most often in relation to ‘The Other’ – Scots are not English; the Brazilians are not Argentinians; the Poles are neither Germans nor Russians, etc. There is a paradox currently in that nations have reverted to their national units to fight a common ‘Other’ – the virus respects no border, race, religion or any of the defining units of identity which humans commonly use; yet we have reverted as societies to our nation states. This paradox lies in Covid-19 reminding us that we all belong to one human species and it is our interactions which have made the spread so rapid and deadly, but our default position to dealing with its consequences is to seek national solutions.

Part of this reversion is the necessary consequence of legislative restriction, although it appears strongly to me that this has been far easier in unitary countries than in federal models. The conflict between New York’s Cuomo and other governors and the current White House incumbent has been mirrored by very different policies in Australian states, and stands in stark contrast to the adherence to the central government’s edicts which facilitated China emerging so relatively unscathed from the virus.

The possible long-term consequences of such nationalism will become clearer over the next few years and will vary considerably depending on the duration and return of the disease and any subsequent mutations. I personally think that the causal racism being employed by many in the west in calling this ‘the Chinese virus’ will come back to haunt the politicians who are employing it for domestic political gain. It seems to me that our thesis that the 21st century belongs to the continent of Asia will be further accentuated by current events, and we will look back on the year 2020 as one when the world’s economic centre pivoted further and faster toward that continent.

In the last few years, one of the most common questions we have received and concomitantly debated internally has been about the power and potential regulation of large technology companies. Companies such as Facebook, Google, Amazon, Tencent and Alibaba have grown to be substantial and powerful parts of the economic ecosystem, and with this has come increased scrutiny and differing levels of critique. For some, their motives are nefarious and they seek to abuse their market power in very similar ways to Big Oil, Big Pharma, Big Banks et al. before them. For others (myself included), these companies are consumer-centric and focused not on gouging but on providing more utility at lower prices; however, with size comes unintended consequences and responsibilities that many of us are still grappling with, such has been the alacrity of their ascent.

Wherever one lies on this spectrum, it would seem to me that the pandemic perhaps offers an alternative narrative to this prevailing critique of ‘big tech’. In the absence of a vaccine, the widespread use of contact tracing and testing appears to offer the most plausible way out of the crisis. In China, the WeChat QR code quickly became the badge of health, helped by its ubiquity and the acceptance of the population that the sharing of private data contributed to a larger public good.

This debate on the trade-offs between data and privacy is now starting to occur in polities of every philosophical persuasion, and different societies and individuals will reach different conclusions. But these trade-offs do look very different when it is a question of life and death. I am struck by the degree of collaboration between companies which are commonly fierce rivals, such as Apple and Google, and also by the fact that size and reach matters hugely to the potential impact of such tracing technology. It seems to me that the very thing which was at the nub of many concerns surrounding these companies – namely their size – is now the potential route out of very strict long-term social distancing. The trade-off between privacy and utility will rage on, but it appears to me that, with this utility now encompassing life itself, many people’s previously strident views may well soften and the power of the large platforms will stand enhanced.

A passenger wearing a face mask as he shows a green QR code on his phone to show his health status to security upon arrival at Wenzhou railway station. © NOEL CELIS/AFP/Getty Images.

Reimagining the joint-stock company

I don’t like the term ESG. In the same way I dislike TMT, BRICS or my current bête noire, TAM, I think it is an epithet which tries to capture a very complicated area in a narrow heuristic and therefore removes much of the granularity which is where the import often lies. However, if I was to pick one topic which I think could define the next decade, it would centre on the role of the corporation in a world in which the broader responsibilities of businesses including, but not confined to environmental and social issues, become far more important.

It is a little known and delightfully ironic fact that the first joint-stock companies emerged in China in the AD 700/800s and over the subsequent centuries they have transformed into the central unit of economic organisation in almost every global society. Most often but not exclusively it has the profit motive at its fulcrum (the stakeholder nature of Japanese capitalism is an honourable example of this) although often chasing short-term profits or rewards to the executive layer sows the seeds of downfall or, at the very least, atrophy.

We have, for many years, tried to find companies which think in a long-term fashion about their own enterprise, as we think such alignment of timeframe creates the best conditions for prosperity over multiple decades. Increasingly in the last decade, this has involved explicit thinking about the company’s contribution to society and I think it is no exaggeration to say how companies are perceived and their actions and motives are examined could change more in the next 10 years than it has in many previous decades. It is not enough now to provide a good product or competitively priced service – where the raw materials are sourced and how workers are treated has become increasingly and rightfully a consideration for many making their consumption or procurement decisions.

This is not ubiquitous by any means – many still turn a blind eye to the environmental and social impact of fast fashion or to the environmental footprint of moving goods around the globe – but it seems to me to be an inexorable path toward this being of greater import. The images of nature re-emerging from mankind’s rampage of the planet will surely be among the most enduring of the pandemic – from wildlife returning to the blue canals of Venice, to the Himalayas being clearly visible to parts of India for the first time in decades, to bears wandering freely in Yosemite. Such powerful symbols of nature using a virus to reassert a visible presence on our shared planet seem to me likely to only further fuel the overriding environmental questions of the next decade and beyond. What I find most exciting is that companies which do the right thing and act responsibly are now putting themselves at a potential large competitive advantage, and consideration of a company’s societal impact will become ever more central to our investment process.

The views expressed in this article are those of the author and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

This communication was produced and approved in June 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

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