28 January 2021

After the flood - prospects for 2021 and beyond

Last week, Ivan Sedgwick debated prospects for 2021 in a webcast for LGB & Co. Ltd clients with Helen Thomas, CEO of Blonde Money. You can find the recording here. Read his thoughts below:

Since then we've had the Redditor/GameStop feeding frenzy in the US, which seems to have culminated in a lot of risk-off trading, and combined with what could be a flood of potential IPOs this quarter, I'm not surprised that we're seeing some weakness in markets at the moment. We do need to look beyond that...

Helen’s view is that the vaccine starts the recession. It’s a useful insight: once life normalises, government support will inevitably become constricted. Lots of businesses won’t reopen- or not under previous ownership. Or with unsustainable debts or pension fund deficits. We should look out for phoenix businesses, new owners of existing assets. “Whatever it Takes” doesn’t assure recovery across the board- look at the lamentable performance of the UK and European banks since the resolution of the global financial crisis. We’ve seen “K-shaped” recoveries before. Arguably that’s the sign of creative destruction, and the pandemic has accelerated changes already in place.

Vaccines don’t remove fear. Some, perhaps many people will remain scared of going out, eating, drinking and travelling- though my own sense is that there will be a big bounce back in activity, and that will outweigh the reluctance of some to socialise. However, the fear of new pandemics will not go away. We always fight the last war. Government spending on life sciences and health care will have to stay elevated, and the realisation that drug development and approval can be accelerated will to some extent de-risk the life science sector.

We should not forget the private equity industry, still with massive spending power, as a potential buyer of old economy and unfashionable companies if there are still cash flows to capitalise or assets to sell. Private equity suffers from little in the way of the ESG constraints that increasingly inform portfolio management in the listed space.

New technological opportunities have become more visible as a result of changes in habits: home working must drive increased cybersecurity requirements, and potentially new use cases for VR and AR. The retail share trading boom is an emanation of this: "millennials with an iPhone and too much cash" was the comment of one of my millennial colleagues.

Inequality has clearly been exacerbated by the pandemic, and in so far as inequality in the developed economies has been driven by the rise of China and the Pacific Rim, that trend can only be exacerbated by those countries' success in coping with Covid. Inequality presents political risks, which in the nearer term are likely to lead to resistance to any cuts in public spending, and support for increased taxation. It's never obvious how dissent will manifest itself- the FT rather cutely observed that the GameStop short squeeze is Occupy Wall Street 2.0. The idea that populism is dead because Donald Trump has been un-presidented, is likely to prove wishful thinking.

I'd welcome feedback and your thoughts (as would my LGB colleagues).

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