Much has changed during the Covid-19 pandemic. The ongoing search for yield has become more acute prompted by the reduction of listed property dividends and growth prospects of equities are under review. Some analysts have predicted that there will be an increase in investment volatility over the next decade, a marked change from the previous one when it all but disappeared.
To add to the complexity, the range of potential investment vehicles available to investors is in a state of flux. Despite the fact that many investors are looking for new investment opportunities, there has been a global dearth of IPOs as new companies have found cheaper alternatives in the form of private equity.
The pandemic has brought important shifts in perspective as well as new opportunities. During the Covid-19 pandemic, many commentators wrote about the possibility of a global /investing ‘re-set’ or wake-up call. Navigating both the actual changes and opportunities created by new perspectives will require fresh insights.
There is a third factor at play; at Rosebank Wealth Group we continued our regular reviews with our clients during Covid, albeit in most cases via Zoom or Microsoft Teams. It became clear to us that not only was the investment landscape changing but in some cases, the pandemic served as a catalyst for some clients to adjust their personal goals. Covid (or its knock-on consequences such as the ability to work from home more) provided a new lens to rank priorities. Some of these changes (such as retiring early, buying or selling property) have an important knock-on impact on investment decisions.
During periods of change, we always recommend that our clients should touch base to review their investment portfolios and make the necessary changes to ensure that their investments are ‘fit for purpose’ for the years to come.
Are traditional investment vehicles still fit for purpose?
Global government debt increased dramatically during the pandemic against a backdrop of low and sometimes negative yields and decreasing growth. Traditionally pension funds have relied on income paid out in the form of dividends in the commercial property sector and interest earned from bonds held. But this year, dividends have taken a knock due to the pandemic, rates are at historical lows and a bounce-back will depend on a recovering economy.
Company listings are generally designed to either raise capital or provide company founders with an opportunity to exit and are generally considered a sign of a vibrant and growing economy. In 1999 in South Africa there were over 700 companies listed on the JSE. As of November 2020, there are 330.
The dearth of new listings is not unique to South Africa; there have been relatively fewer listings in both the UK and the US relative to previous years, mostly due to the fact that there are cheaper ways of raising money. In November 2017 research by the US-based Vanguard Asset Management noted that in 1996 the US had over 7 000 listed companies, but by 2016 this number had fallen below 3 800. Vanguard speculated that the reasons for the drop in listings were the easy access to alternative cash (driven by a low-interest rate) as well as the rise of angel and venture capital businesses owned by wealthy individuals looking to invest in promising start-ups.
However, in addition to the absence of new listings, the JSE has seen over 350 firms delist since 1999. Analyst Simon Brown, writing for Finweek, explored this theme in his article ‘Where did all the listings go?’ Brown said that some companies had delisted due to the onerous reporting requirements while others had cited the sheer cost of remaining listed. However, the biggest issue was the reduced capacity to raise capital, the raison d’être of being listed in the first place.
This is bad news for private investors, unit trust investors and members of pension funds. Alternative vehicles for investment, including venture capital funds and private equity funds, generally have high barriers to entry. From a layperson’s perspective, alternative investments are also often opaque, do not offer day to day pricing, are illiquid and require a commitment to multi-year investment periods.
Globally, there has been greater interest in private equity. The Institutional Investor estimated that the value of private equity investments could double from $4.5 trillion to over $9 trillion over the next five years.
Trends to look out for over the next ten years include the increasing popularity of hedge funds and the diminishing market share of exchange-traded funds (ETFs). The predicted increased volatility over the next decade, (mentioned at the beginning of this article) would create the ideal investing environment for hedge fund outperformance relative to both long-only mandates and ETFs.
ETFs perform optimally in an upward trending, low volatility investing environment. It is therefore quite logical that they should have attracted the flows that they have in the period between 2009 and the present. However, the predicted storms ahead will offer less refuge.
The JSE has taken steps to become more competitive and boost its fundraising potential. In early November it was announced that it had partnered with UK fintech company Globacap to launch private placement platforms on the JSE. The first sectors to be targeted will be infrastructure and small and medium business fundraising. These fundraising vehicles will provide alternatives to the bond markets, venture capital companies and banks.
Have investment themes and sectors shifted permanently or temporarily?
The Covid-19 pandemic did not wreak its havoc evenly on either individuals or businesses. The S&P 500 is 5% higher in November 2020 than it was in January this year. Some businesses including Zoom, Netflix and Docusign have had a wonderful year. Online retailers and delivery companies did well, pharma companies thrived and the price of gold reached an all-time high of $2 067/oz.
On the other hand, many business sectors were pummelled, suffering severe losses or even bankruptcy. Hardest hit were the tourism/ entertainment related sectors including airlines, hotels and restaurants, gyms and those offering ‘physical presence’ entertainment. Non-food retailers (think the Edcon Group in SA and JCPenney, JCrew and Maceys in the US), as well as listed property companies specialising in office and retails space and energy companies have had a really bad year.
Seen together, the diverse experiences of the different sectors have brought the investment landscape to a new cusp and may herald new consumer trends. Some of the shifts in spending patterns and changes were not new but were simply accelerated during the pandemic. Examples of changes included the following:
- Increasingly, consumers have become more aware of the impact of their choices on the world’s resources, and sensitivity about the overconsumption of certain foods, fashion and tourism. Research has revealed the extent of overproduction and waste in the fashion industry.
- Concerns about climate change came to the fore, with an increased aversion to fossil fuels. It is possible that industries that sell ‘single-use’ goods or use excessive amounts of scarce resources such as water in their production processes will have to adapt to new consumer demands.
- The pandemic changed the way organisations and individuals made decisions about training, learning and development. Academic institutions found ways of doing online exams, teaching and seminars. This has enormous implications for global teaching.
- The steady move to workplace flexibility is likely to have a ripple effect on the need for urban office space. More significantly, severing ties between where we live and where we work (and pay tax) could have profound long-term consequences as more countries like Estonia offer ‘e-Passports’ to those wishing to start companies in the European Union.
- It is likely that many firms will review their dependence on those product supply lines that were disrupted during the pandemic. This may be accompanied by more home-market manufacturing (‘re-shoring’) and de-globalisation.
- The pandemic spurred a surge in healthcare innovation. In Israel, over 30 health-related technological innovations were launched during the pandemic. Now that these innovations are out of the bag and being put to good use they will find a life of their own.
Post pandemic, asset managers will be confronted with the question of whether they should invest in those tourism/ aviation/ hotel groups whose share prices were either pummelled, (in the expectation of a mean reversion or price bounce back) or managed to remain flat because of any ‘pivots’ (new Covid-19 word) they may have introduced. Alternatively, to what extent should asset managers continue to invest in those e-wallet, e-commerce, mobile payment system or sustainable energy companies that outperformed during the pandemic?
In conclusion, as we write in November 2020, there has seldom been a better example of the old adage; ‘don’t pick yesterday’s winners’.
It is likely that your portfolio should be reviewed to ensure that it still suits your needs and remains fit for purpose in the post-pandemic future. We would urge you to consult your financial advisor to see how the shifts described above might have affected your financial plan. Given that recent changes could also book-end the end of one era and the beginning of another, a second opinion may also be justified.