After two years of focusing almost exclusively on the Covid-19 pandemic it's right to ask what the long-term themes are that could shape the future, and investment returns, once it is over.
Here are three that we believe will be important.
#1 The Climate Crisis
The Cop 26 Climate Conference in Glasgow was not a pleasant spectacle. Politicians dithered, diplomats maneuvered, and the young were handed the stage to plead desperately with older generations for action.
It is tempting to dismiss progress made at these conferences. After all it is never really enough.
It is now widely agreed by scientists that we must keep the rise in temperatures to 1.5% to avoid devastating effects. This conference it seems kept that goal in sight but only just. Yet the changes agreed at Cop 26 are profound. They reshape key industries around the world, sounding the death knell for deforestation and methane whilst very nearly killing off coal too. They also highlight the incredible difficulties that polluting industries will have in years to come gaining finance to invest and grow.
Among the more complex agreements reached in Glasgow was the formation of the Glasgow Financial Alliance for Net Zero. This is chaired by the former bank of England governor Mark Carney. It sees asset management companies – such as those with which you invest – commit to moving $130 trillion into investments that are net zero over the next sixty years. This in affect will push oil companies, miners and those with poor governance standards ever more to the fringe of the global economy.
They will be forced to seek finance from less scrupulous sources such as Middle Eastern sovereign wealth funds and state-backed Chinese conglomerates. For some this leads them to say that portfolios should only now be invested in those areas of the market that are on the right side of the change that is being made. Perhaps we should only invest in sustainable industries?
This is of course a perfectly reasonable personal choice and there is much to support the view that over the long-term this will be rewarding. If nothing else the sheer amount of money that must move into these areas should provide long-term support to share prices.
Yet there are risks too. The emphasis on sustainable businesses means that it is necessary to pay more for the same amount of profit generated by the sustainable companies in the portfolio. It is also right to point out that whilst the environment for sustainable investing is evolving rapidly it is still the case that there are significant areas of the market that it is not possible to include in a sustainable portfolio because the products just do not exist yet.
For example, the UK government is preparing to make ‘green bonds’ widely available. These are bonds that will fund exclusively net zero activities by the UK government. However, it is not yet possible to buy these within a fund. These restrictions mean that for the time being it is not possible to build as diversified a portfolio made up of funds that pass strict ethical, social and governance (ESG) screens as it is to build a portfolio without these screens.
So, after Cop 26 we can conclude there has been progress, but not yet enough. We can also conclude that the environment for investors seeking to own companies in what are perceived as dirty industries has got that much tougher. Yet, we have not yet reached a place where it is possible to build a fully diversified portfolio at the right price exclusively focused upon ESG goals. Not yet, but nearly.
#2 The potential end of globalization
Since the 1990s the world has drawn progressively closer together. Indeed, since the collapse of the Berlin Wall it has almost been assumed that countries would progressively become more open, would trade more freely, would become less suspicious of one another.
This process though has had important social impacts across the world. It has certainly lifted many billions of people out of poverty. However, these have been predominately in China and a handful of other emerging economies.
In the West there are communities that have experienced globalization in the form of immigration, lower earnings in manufacturing jobs and tougher competition. For those people it is not seen as a universal success, and it has triggered a wave of nationalism across the rich world.
The pandemic has accelerated this trend. As the world shut down companies bemoaned the fact that their suppliers and component parts were coming from across the whole world, arriving ‘just in time’ to meet customer demand. The merits of goods produced locally were immediately apparent. Governments too have their doubts about unfettered globalization.
The last US President, Donald Trump, was clear on his frustrations with globalization. He wanted the Chinese to buy more American ‘stuff’. For President Biden the problem is more nuanced.
Biden is focused on making sure that the Chinese steal less of the valuable intellectual property developed in the United States and simply copy it. He is also determined to make sure that the United States is not vulnerable the access of Chinese technology companies to our markets – as we saw with Huawei in the UK. We can also expect the West to become increasingly hostile to takeovers by Chinese companies.
China for its part could seek to assert its own independence from the global economy by launching to disrupted supply chains because it relies on overseas sources for key components of its economy and society – like medicines, batteries and semiconductors. So how will these tensions play out?
Firstly, we can expect to see the Western world try to restrict its own digital central bank cryptocurrency – in a bad to disrupt the role of the dollar in the global economy. What is the impact of all this tension for investors? Most simply it is likely to push up inflation because it will force countries in the West to pay more for goods and services made locally. It will be a source of geo-political tension as the world assembles around multiple blocs of influence. President Biden wishes there to be a ‘coalition of democracies’ strategically positioned against China.
Yet, for its part the European Union is more than happy to break from this to strike pragmatic trade deals that help its position. The overall impact of this is a world with more tension, more volatility, and more inflation. Yet, there will be new opportunities for businesses that can benefit from the trend in the rich world. It will require careful navigation by your investment managers.
#3 The next technological revolution
‘Necessity’, the old proverb goes, is the mother of invention. It is perhaps for this reason that every time humanity has faced an epic global crisis, it has birthed the most exciting waves of technological innovation.
Each time disaster has struck, the number of patents being issued has soared. The so-called ‘long depression’ of the world at the end of the 19th century birthed the light bulb, the steam turbine, the radio and the refrigerator. The Great Depression of the 1930s saw the advent of the cathode-ray television and the modern airline industry (not to mention the ball point pen).
There are skeptics of this optimistic take on the world. Some suggest that as society develops, the impact of our technological progress is becoming less profound on our life. They cite examples such as indoor plumbing and argue that it had a far greater impact on people’s daily lives than more recent innovations. Yet the roster of technologies that stand ready for widespread adoption after the global pandemic is impressive enough to dent any cynicism.
Here are three key technologies that are coming of age as we move out of this pandemic.
The extraordinary development of Covid-19 vaccines built on a brandnew technology called messenger RNA (mRNA) was one of the things that arguably rescued the world economy from the pandemic of the past two years. Like all new technologies it attracted skeptics. Yet the results are extraordinary. As we prepare for a new wave of infection from the Omicron variant it will be these new vaccines that can evolve quickly enough if needed to provide fresh protection. Many said this new vaccine was ‘rushed.’ Yet in reality it was the product of decades of research to build a platform that can do more than just help fix Covid-19.
In essence mRNA therapies provide a recipe that can instruct a body’s cells to produce the specific proteins it needs to build drugs inside the human body.
The roster of conditions that could potentially be beaten by this emerging technology is huge. It includes even the most perpetually elusive of vaccines, that for HIV. However, it could also be used to tackle malaria and tuberculosis. It even threatens to provide solutions to prevent the occurrences of cancers, notably colorectal cancer. The team of scientists behind BioNTech’s contribution to the Covid-19 vaccine prepared with Pfizer, believe that this innovation is at least as significant as the creation of synthetic insulin for diabetes over 40 years ago.
For investors it will offer great opportunities, but they will not come without risk. Necessarily optimism will surround firms such as Moderna which will issue results for its HIV vaccine at the start of 2022. However, whilst these technologies change the world, they rarely do so on the timeline that stockmarket investors seek.
Virtual reality has long been on the horizon but for most of us the idea of strapping a smartphone to our face so we can walk around and pretend we are on the moon has been nothing more than a novelty. “ This innovation is at least as significant as the creation of synthetic insulin for diabetes 40 years ago.
As we emerge out of this pandemic though it is a technology that could be coming of age. At the forefront of this process is Facebook, now renamed ‘Meta’. The firm is seeking to become a business which creates 3D virtual social environments that we all live in as part of our daily lives. For many of us, this rings alarm bells so loud we can hear them clanging in the real physical world where we currently feel quite content spending our time.
Will these virtual reality worlds be able to gather total information on our lives and use it for commercial or even more nefarious purposes? What will the impact be on addictive behavior, anxiety, obesity?
How on earth will our children by able to distinguish between the real and pretend worlds? Importantly, will it even be possible to choose out of these worlds. Or will we need virtual reality experiences to shop, work live or access information? Set against this of course is the enormous potential to bring people into social environments who might otherwise be unable to because of disability or geography. There are huge utilities in the medical profession, for collaboration in science and to enable greater participation in decision-making across society. However, the positives and negatives are weighed, the US technology sector is pressing on and believes it is at what Louis Rosenberg, a veteran of the technology industry has called the ‘transition moment.’
There are huge profits to be made and they will come in companies that are currently viewed as passing every test for environmental, social and governance standards. Yet will they ultimately help the world? Time will tell.
We have been expecting our robot butler to arrive for decades now. Yet somehow robotics and artificial intelligence have always disappointed us. News stories tell us that computers can now beat people at chess – but they can’t take the bins out yet.
For investors it is just as important for us to understand the limits of AI as it is its potential. One of the largest global accountancy firms PWC has predicted that by 2030 AI will have added $16 trillion to the global economy. Indeed, the chief executive of Google Sundar Pichai would have us believe that it will have a bigger impact on our life than the advent of fire.
Beyond the hype though, the importance cannot be underestimated. A look at the spending currently taking place on AI conducted by Stamford University shows just how diverse its applications are.
Just under 10% of all the money being spent is focused on making autonomous cars. Yet over 6% is focused on developing cancer drugs.
It gives the world additional intellectual firepower in every sector.
Progress has never been quite as fast as hoped. The expected dates for self-driving cars for example has been pushed back and back and there are still fundamental disagreements between Tesla and the rest of the industry about the right technology path to take. In the real-world, business leaders tend to emphasise the huge challenges of implementing AI into their companies. The frustrations people feel with AI is also profound.
Consumers feel less valued when they are forced to converse online with a chatbot, where previously a real person would have solved their problem. Whilst it may be possible for AI to interpret ultrasound scans in a hospital, none of us want to get bad or for that matter good news in that room from a machine. For investors the challenge is that almost every company in the world now claims to be a ‘technology company.’ Fund managers joke that they will arrive at a toilet paper manufacturer only to be told that they are ‘really a technology company.’ It is a buzzword designed to win investment.
AI is soon becoming the two letters that every chief executive speaks. In reality though not all will be able to implement this technology effectively, many will simply squander shareholder capital trying. Disseminating the potential from the hype will require careful active management in the years ahead.