Stockmarkets move ahead of economic recovery. Economies will resume - but the global economy will change. Some sectors may be unrecognisable. Not just with a legacy of debt but operating with new business models and driven by a changed social agenda. Big companies bailed-out today may be called to account politically for their failure to build-in resilience. Investors may need to focus more on sustainable growth rather than high dividends.
National resilience will demand greater use of tax and legislation to encourage effective business structures. Too many company boards have presided over excessive dividends, share buy-backs, and unreasonable executive rewards – leading to over-borrowed businesses with no buffers for bad times. In contrast, many growth businesses have had to operate with lean capital-lite business models. They may emerge stronger, and even be in a position to acquire weaker rivals.
When the economy re-opens, responsible investing must play a greater role, taking to task boards that incentivise poor short term behaviour. Regrettably, some businesses have been much too quick to put employees onto state support, when other adjustments might have been made.
What are the themes that investors should note - apart from debt and share buy-backs? Companies structured to pay little tax will be one area of risk, often combined with an apparent statelessness. Tax havens can be a virtual home for cruise companies, tech businesses and some private equity, but do not have the resource for bail-outs. A re-set of tax on a global basis seems likely.
Despite all the money being pumped into economies by governments around the world, even lower inflation and interest rates are now likely. This disinflation trend has been in place for more than a decade, but the loss of wealth will cut consumer confidence until that capital safety-net is rebuilt. Low inflation and dividend cuts have a big impact on pension fund liabilities and the balance sheets of many big companies. Younger growth businesses typically suffer less from these legacy problems.