investment viewpoints
Outlook 2021 – alternatives
The sustainability transition to a Circular, Lean, Inclusive and Clean (CLIC™) economy
We believe the sustainability theme will continue and even accelerate in 2021, as well as in the years to come, as it seems all economic stakeholders are now starting to embrace sustainability. Importantly, consumers are becoming increasingly conscious of their responsibility and power. The finance industry is also becoming more selective of the companies they lend to, with this process being increasingly based on sustainable criteria. Meanwhile, governments are becoming more active, with their efforts generally being focused on two fronts: regulation and stimulus.
In the middle of these mounting pressures from consumers, lenders and regulators, companies that embrace the sustainability revolution are likely to benefit from growing market share, favorable financial conditions and government subsidies. Those that ignore this transition are likely to underperform, suffer from diminishing market share, a higher cost of financing and could be subject to fines and / or rising taxes, in our view.
As a result, we believe it is now paramount to incorporate sustainability related factors when making investment decisions. In the alternative world, long/short equity portfolio managers who understand and incorporate these themes within their investment processes are likely to be the ones who will benefit the most from this trend. Event-driven strategies could also benefit from a pick-up in “green” merger and acquisition (M&A) activity as some companies choose to direct their green transition efforts through M&A rather than organic transformation. Traditional relative value and global macro strategies are less likely to be able to extract alpha from the sustainability theme.
There is a chance that the world might not build back better, initially, out of the current health crisis. The economic impact has been strong. Companies that are trying to survive may put aside green projects, while governments may make concessions in order to get the machine back on its feet. However, green stimulus initiatives are now a reality and should pave the way to the development of sustainable activities over the medium to long term.
Governments are likely to change their spending patterns with an increased focus on social and healthcare spending.
What will a post-coronavirus world look like?
2020’s health crisis will inevitably leave scars. Social distancing and the wearing of masks may need to last longer than the actual virus threat. If you follow the Maslow pyramid of needs, a motivational theory in psychology, safety (personal security, employment, resources and health) comes before love and belonging (friendship, intimacy, family and sense of connection).
Once fear over health security is behind us, we believe the fear of social/economic insecurity will take over. The population most affected by the pandemic, that has so far remained calm due to safety concerns, will start to protest about inequalities and claim compensation. Whether countries go through social unrest or not, in the end, we believe governments will have to help citizens more directly and also increase pressure on corporates to do the right thing for society (potentially at the expense of their equity valuations). We assume that governments will need to support the vast majority of the population living on a month-by-month basis by raising taxes, increasing regulations and kick-starting vast infrastructure projects to promote job creation.
In our view, governments are likely to change their spending patterns with an increased focus on social and healthcare spending. Sustainable considerations and government policies that focus on long-term considerations, incorporating science, will also be reinforced further. Collectively, this should have a strong impact on industries, corporates and their valuations. We expect an unusual dispersion of outcomes for companies as a function of regions, sectors, robustness and strategic importance, which could prove fruitful for a disciplined, process-orientated active investor. In this environment, we expect equity long/short and relative value volatility strategies should be able to capture opportunities.
The management of the pandemic has led to mountains of debts which are likely to have monetary consequences. Once the demand shock, which has acted as a powerful deflationary force, is over, we believe inflation could make a comeback. Indeed, in the longer term, the collapse in supply combined with aggressive government spending (infrastructure), the relaxing of inflation targets (how will a central banker defend not saving businesses in the name of an inflation target?) and the aim of reducing the high debt burden, are likely to be supportive of inflation. In our view, this will have an impact on FX and fixed income and global macro strategies are likely to be the beneficiaries of these trends.
What are the likely consequences of a Biden Presidency?
US politics is often more akin to a power struggle than a debate of ideas where the endgame remains the welfare of citizens. As an example, the current Secretary of the Treasury, Steve Mnuchin, has very recently let the emergency credit programme – a credit facility targeted mainly at small and medium businesses – lapse at a time when it is sorely needed. It remains likely that the Republicans will do as much as they can to ensure President Biden achieves as little as possible. Biden, however, is an experienced politician who is building a team of specialists. Former president, Ronald Reagan was able to pass many reforms in spite of a divided Congress because they were popular. This is probably the best recipe for Biden to follow, focusing on widely supported policies that would risk impacting the re-election chances of those who oppose them. It is one thing to not oppose the nomination of climate change deniers in many key roles, as has happened during the Trump administration, but it is another thing to vote against vastly popular climate initiatives. Similarly, a stimulus package or the increase of the minimum wage will be hard to vehemently oppose. Sustainability is generally a topic that is supported by the vast majority of the population (at the 2020 exit poll two thirds of US voters considered it to be a very important topic).
Typically, alternative strategies benefit from a universe where there is dispersion and differentiation. Our strategies tend to benefit from volatility, but they also can do well when there is a coherent investment landscape. In that sense, the combination of a potentially strong economic rebound and the return of cyclical investments, alongside differentiation between sectors and countries, could be beneficial. There will also be differentiation between the euphoria linked to the end of the virus and the economic recovery, which may not be immediately achievable in all regions. Therefore, we expect equity markets to differentiate further. Finally, a coherent policy calendar (as opposed to an abundance of tweets) should provide a more supportive environment for alternative investments.
Informazioni importanti.
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