Portfolios

As I have been posting much more frequently recently to offer readers some insights during difficult times, this week’s meandering heads off into the future and attempts, Beethoven like, to find leisurely pastoral scenes after a frightening storm. But only finds something less attractive.

So this is an opinion piece and you can stop reading now if you were only expecting market commentary.

A potted history

I have read some serious commentators (Andrew Rawnsley in The Observer, for example) pointing out that the reaction of the UK government to the coronavirus threat effectively makes a bonfire of everything Conservatives in the UK claimed they believed in. For very good reasons, the UK will have a public spending budget not seen since WW2, life dictated at a microscopic level by the state (not nanny state, more like Big Brother), nationalised railways (just to start, wait for more), enhanced State benefits and so on.

My thinking has for a few weeks been that whatever the economic consequences of the virus, there will in time be a seismic change in the relationships and rewards in the capitalist system.

When I was training to be a Chartered Secretary, just pre-Thatcher in the 1980’s, we were taught that big companies were ideally governed in the interest of stakeholders, not just shareholders. Other interests might include employees, pensioners of the business, consumers, the environment and even the public purse. In those times there was much talk of putting representatives of these other interest groups, especially employees, on company boards.

That seemed civilised to me. The large corporates have been identified as self perpetuating entities that in some cases are larger and more powerful than governments right back to the days of the Dutch East India Company, who had the largest military in the world. We have had the American ‘corporate robber barons’ like Carnegie, Rockefeller, van der Bilt and maybe now Zuckerberg and Bezos effectively controlling important parts of the largest global economies.

The US writer Thomas Pynchon suggests that the already completed phase of evolution after humanity is the American Corporation. Y N Harari in his best selling book ‘Sapiens’ explores at some length the management of human interests by corporations and collective systems, with the obvious diametric opposite to the corporation being the truly Communist state, like North Korea.

In response to the outrageous use of power by the owners of corporations, the USA developed anti-trust legislation and anti-monopoly law was a big discussion topic when I was studying economics. In those days everyone feared IBM! As a student I felt that checks and balances were at least an objective of the elected representatives in a democracy.

Come the mid 1980s and Reagan and Thatcher and the world changed totally, switching hugely in favour of capitalists (in the economic not political sense) and even more in favour of the managers (directors) of companies. As time went by, even the interest of shareholders seemed to be demoted behind the managers’ remuneration packages and the earnings of corporate lawyers, bankers and anyone powerful enough to get their nose in the trough.

Some global governments held back this rapid rebalancing of economic interests but in general the economies of those countries (say France, for example) did less well. The use and abuse of the unfettered financial system, especially in the selling of vast amounts of debt, boosted the economies of the marauding members of the even freer free market.

The financial crisis brought that to an abrupt halt but the sinners were not just forgiven but bailed out with public money and made ready to rush off again in pursuit of directors’ remuneration and spending profit or even borrowing to buy back shares (which makes the business more of a stand alone entity, not answerable to anyone).

Of course, to keep governments sweet, it was necessary for the very biggest and often shadowy beneficiaries to spend their small change on lobbying, funding election campaigns and buying up the mass media to keep the message right. At least that has been true in the USA, the stock market capitalisation of whose businesses is more than all the rest put together (never mind the wealth not in listed shares).

A body blow, from an unexpected quarter

That potted history brings us to Covid-19. Now – The ” ” Strikes Back. Fill in the space according to your personal view of the world.

It is well known that modern capitalism only works because of insatiable consumption. Insatiable consumption will destroy the environment without major changes to the mix of goods and services consumed. If I was ‘the environment’, I would work out that my best defence strategy would be to attack the consumers and directly reduce consumption. It works really fast!

Now I am not a sci-fi writer even if my readers think I am prone to flights of fancy, and I have developed a sceptical opinion of both religion and philosophy (I am too prosaic), so will stick to observing what is happening and what might follow.

• What is happening right now is that all over the world nation states are dictating what people and businesses do. Like they usually do in China.

• Everyone in the UK who wanted to privatise the NHS now loves it to bits, especially those with a fever and a cough (they say there are no atheists on a sinking ship).

• Decent business owners are directing their facilities to help out and the way companies react now will have long term impacts on their future prospects with consumers.

• Politicians who pursued austerity to the point of (probably) killing citizens are now endorsing huge amounts of government spending and libertarians who usually want to inhibit the government’s ability to keep an eye on what we all do are not batting an eyelid at the passing of unreviewed legislation to grant powers even Mr Putin would be happy with!

• ‘Safe’ investments in high quality bonds or fixed interested securities and even gold are being sold in huge amounts, with the only asset in demand being hard currency (probably US dollars). Portfolios whose diversity depended on the classic equity/bond mix are losing less money than the equity markets, but still losing money rapidly. Cash is king.

Unprecedented is an over-used word, but in this case it is the right one. The financial aspects are not a surprise but the political and social aspects are new to everyone who has not lived through a war.

What will that mean for the future?

Of course until we see a slowdown in the rate of infections, we can’t realistically assess the future, because we have no sensible timescale nor can we measure the damage.

But we can expect the relative status of the state to move back towards the level we saw after the second world war.

Well governed businesses will more likely survive than the ‘share buyback/fat directors’ bonuses’ businesses that may have been stock market darlings until now. So the mix of interests and actors in the financial world will be different, just as it was after the 2008 crisis.

That means we as investors need to think very carefully not just about the countries and sectors we invest in (at decent prices), but to focus on the sort of companies, especially in terms of sustainability and governance. And I would add another letter to the ESG acronym – T – ESGT, for environment, sustainability, governance and tax paying.

All the borrowing we are now seeing will potentially go into asset prices if governments don’t change their tactics on taxation. I think this time they they will expect a payback from business for preserving the daily heroin fix of consumption. And they may even be supplying the ‘methadone’ of public spending as a substitute.

It probably goes too far to say that capitalism is going into rehab but it will need to moderate its habits.