The prospect of vaccines round the corner does focus the mind on what the post-Covid investment scene will look like. This month we touch on a few topics that are likely to recur, including taxes, taking income from investments, decarbonising the economy, and of course life sciences. On which, whilst it has in the short term been better to travel than arrive (many AIM Covid-19 plays have halved from their summer peaks), the world will certainly look different the other side of the pandemic.
Whilst we still await more detailed news of the Oxford vaccine, the one which the British government has made the largest commitment to, and which if it works should not have the problems of temperature stability of the Pfizer candidate, it does look as if vaccines will start to be rolled out relatively soon. The assumption at the beginning of the pandemic that like other viruses (HIV, for example) the best we can hope for is effective long term therapies, may prove to be too pessimistic. But at this stage, we still have no idea what level of immunity the vaccines offer. It is entirely possible that Covid-19 continues in the population as flu does.
What is certain is that whereas pandemics formerly sat in everyone’s risk register and remained safely ignored there, that will not be the case in the future. Vaccine development has stopped being a Cinderella area of the pharmaceutical industry. The first generation of vaccines will not be the end of developments. There will be a search for vaccines with efficacy across a wider spectrum and with different modes of action (this is what Scancell (SCLP) are trying to do with Covidity). Testing infrastructure will be consolidated and maintained. Infection prevention (who would have thought masks would be a common sight on the streets of London?) will continue to be prioritised. And the realisation that drug development can be expedited ought surely to cause a rethink of the current laborious and inefficient testing regimes. We will continue to look for interesting life science opportunities, but will not be doing so by just trying to play a “second wave” of AIM-quoted Covid beneficiaries. There are plenty of other interesting developments across the spectrum. We are delighted that experienced US life science investors such as Redmile are taking an increasing interest in the market here as they realise that there is good investable UK science to capitalise on.
How we pay for the slowdown remains a mystery, the problem that dare not speak its name. Tinkering with CGT as suggested by the OTS last week will make no more than a trivial difference, but in the current climate allowing what looks like loopholes for the wealthy to persist may be politically impracticable. The below-the-line commentary in the FT regarding the potential abolition of the tax break on venture capitalists’ carried interest was interesting, with arguments that this might cause the “industry” to flee abroad. As if leveraged capital structures and tax shelters were an industry rather than a tool for wealth abstraction. This sort of thing will not play in the tabloids. Assume that there will be some change. EIS however does not seem to be in anyone’s sights.
The UK has been unusual in that investors have pursued income from equities rather than bonds. In the US the Muni (municipal bond) market satisfies retail investors’ appetites for income, and the equity market is comfortable with the idea that successful companies reinvest for growth. Terry Smith has been an apostle for this view in the UK, and his performance over the last few years has amplified his opinions. Necessity being the mother of invention, the suspension of so many FTSE 100 companies’ dividends, whether at the behest of the regulators or because the money had evaporated, has converted many pundits to this view. At LGB we sympathise with it: equity investment for income ought not to be a priority. If you want income, then there is no equivalent to the Muni market in the UK, and the government will barely pay you to look after your savings. However, we continue to be able to find SMEs who will pay a high rate of interest on secured debt. There is no certainty in investment, but we are proud that our MTNs have so far proved a more reliable source of income than the FTSE 100!
The UK government continues to look for “shovel ready” projects to try to keep the economy ticking over - defence spending is being increased markedly, for example, and is also pressing ahead with decarbonising the economy. Boris Johnson has upped the ante on this in his announcements of 18 November. The bringing forward of the target date to forbid the sale of new internal combustion cars from 2040 to 2030, which will create huge demand for charging infrastructure was confirmed. Earlier this year we saw the banning of new gas central heating in houses from 2025. Electrification of the rail network is back on the agenda. Aggreko, the supplier of generators for temporary power, announced on 19 November that they intended halving diesel usage by 2030 and going carbon neutral in the longer term. We continue to follow AFC (which announced a manufacturing deal with a Dubai based company last week), Ceres Power (CWR) and ITM Power (ITM), and it is interesting to see Infrastrata (INFA), which has a project to develop gas storage caverns in Northern Ireland, is already planning for their use for hydrogen in succession to natural gas. The hydrogen economy (its production, storage, transport, and conversion to heat or power) will continue to be a focus for us.