While we remain in the midst of the crisis, it is too early to say with confidence what the lasting implications of this crisis will be. Longer term implications will be driven, to a great extent by the depth and length of the downturn which, in turn, relates to the veracity of subsequent waves of the virus.
The actions of policymakers have gone further than any seen in living memory. Monetary and fiscal policy have been deployed in such scale and in a manner where central banks will effectively be funding fiscal largesse. The economic shock can be expected to be significantly deflationary in the short term but there is potential for a seismic change, on a longer-term perspective, on the outlook for inflation and a potential end to long running secular stagnation. At present, this is only a risk, but much larger government spending, financed by ‘money printing’ is likely to become a permanent feature and, in time, this may well alter the investment landscape.
For the time being, with a deep recession unfolding, history would suggest that the positions of companies with stronger financial and market positions will become more entrenched against companies with weaker balance sheets and competitive positions. In that sense, ‘winner takes all’ is likely to continue as a dominant theme across and within sectors. A number of our holdings, including the tech giants Amazon, Microsoft, Alphabet and Facebook remain well placed to capitalise on these trends.
The crisis is likely to accelerate a number of existing trends including the move to online retail and the experience of virtual working will likely lead to a lasting change in practices of businesses globally. Resultant reduction in demand for both retail and commercial office space may well have profound and long-lasting implications for the property market. The travel industry may see consolidation and a permanent reduction in demand. Despite industry challenges in these segments, stronger positioned companies will be well placed to consolidate their power, once we emerge from the crisis and demand improves.
In addition to these points, the experience of the pandemic may well encourage businesses to shorten supply chains and to seek more control over factor inputs to production. This may well be linked to a general move towards a more introverted and less global world politically and more nationalistic policies.
The Eurozone has once again been exposed as relatively ill prepared to deal with a crisis. Lack of a fiscal union and political resistance to mutualisation of credit risk across member countries continues to be a source of stress within the area and Italy remains a key source of risk for the whole political and economic project.
Markets have adjusted rapidly to price in a new normal for a post Covid-19 world. Inevitably, while some industries will be challenged, there will likely be longer term winners even within those areas where stress currently appears highest. For this reason, and because valuation in certain areas has reached historic extremes, the Board believes that it remains appropriate to remain balanced within its approach to equity exposure. Furthermore, yields on government bond markets have fallen to new historic lows. Prospective returns from fixed income assets have diminished and, while central banks are underwriting credit risk to a certain extent, the Board believes that equity markets will provide attractive long-term returns.
FCIT remains focused on listed and unlisted exposure to equities which provide exposure to long-term growth opportunities and, through its managers, identifying those companies with sustainable business models. The Trust remains balanced in its approach to equity market exposure, seeking to deliver growth in both capital and income from a range of strategies which are diversified geographically and by style and sector.