Five investment themes post Covid-19

michael nichol

Investors around the world are currently facing two major issues: the immediate one of whether their portfolio is protected from the sudden and savage economic shock caused by the tragic health pandemic, and secondly, what the investment landscape will look like once we have been through its worst effects.

For Michael Nicol, co-manager of the Kames Global Equity Fund, both factors are intrinsically linked.  

“The first is all about company balance sheet strength, secular or structural demand, levels of flexibility on costs and margin protection,” says Nicol. “When markets fall there are always defensives stocks. However, they are not always the same ones, and this has been very apparent this time around too.”  

“As for the investment landscape, we believe that themes post Covid-19 will closely resemble the themes that have driven equity markets over the last few years. However, the themes will be, as Schneider Electric stated in their first quarter 2020 results presentation, ‘fast forwarded’ as a result of the demands of the modern world post Covid-19.”  

Below, Nicol and the Kames Global Equity team look in turn at the five themes which he believes will drive equity markets post Covid-19; technology, ESG investing, automation, healthcare spending and deglobalisation.   

“Ways of working and communicating with customers, suppliers and colleagues will undoubtedly change permanently into the future as the Covid-19 pandemic has forced everyone to radically adapt their working practices. Working from home and relying on remote accesses will be accepted as an increasingly viable way to operate normally, given companies and their staff are now quickly discovering what is possible, available and reliable in virtual environments. Technological development is the enabler of this progress. Our world will evolve further into the clouds, hosting ever smarter virtual applications that accelerate corporate productivity and efficiencies.”  
ESG Investing 
“Sustainability is the most important aspect of the investment case for a company. In order to determine this, a close look at the company’s environmental impact and social and governance polices is vital. There will be increased demand for renewable energy and products and services that will allow the world to function in a cleaner, more effective way than in the past. This investment theme has been important but is still not fully understood by a significant part of the investment community, namely passive and ‘value’ investors. We expect an acceleration in acceptance over the next several years.” 
“It is clear industrial disruptions, whether from a global pandemic or other economic shock, make managements look closer at their business model and automation allows companies more flexibility on costs and capacity. This ties in with digitalisation and technology, all of which offer structural demand.”    

Healthcare spending 
“The Covid-19 pandemic has highlighted issues of insufficient healthcare capacity and resilience, particularly in countries where the sector has seen cuts to spending in recent years. Expect these spending cuts to reverse as electorates demand a more resilient safety net for the day when they come to rely on the healthcare system they have funded. This may require a rethink in terms of some of the social contracts in place between the public and the health sector, especially with regards to the level of private sector involvement in healthcare provision and the size of contribution that individuals expect to make. Focus will also increase on ensuring that public are getting value for money in areas where there is little innovation, like generic drugs and relatively standard equipment and medical procedures.  
“Expect taxpayers to also look to reduce healthcare costs that arise from modern sedentary lifestyles where significant future financial costs can be avoided by making changes now. So some areas where governments are often scared to get involved for fear of being branded a ‘Nanny State’, like reducing sugar and fat consumption, may be open to higher levels of regulatory involvement. Meanwhile the trend towards increased health and wellbeing among some people is likely to receive more explicit support in a bid to increase exercise, activity and fitness levels.” 

“The dangers of outsourcing the majority of production to a specific geographic area were becoming more apparent due to trade issues before the current pandemic. De-risking supply chains will now be at the top of management priority lists and probably many governments too.”

Kames Capital is a specialist investment management business. From Edinburgh and London the company manages GBP37.3 billion (EUR44billion) on behalf of UK and international clients – including pension funds, government agencies, financial institutions, wealth managers, family offices and financial advisers.