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Life after COVID: this time it is different

Simon Brazier, fund manager of  Ninety One’s UK Alpha Fund, writes on the outlook for the UK equities for 2021.

COVID-19 has accelerated many of the trends that were already in place before the word ‘coronavirus’ entered the everyday lexicon. Although the UK’s vaccine rollout is clearly going very well, and this year promises some semblance of normality, the consequences of the pandemic for the UK economy will be long lasting and deeply structural. While the short-term outlook has improved in recent months, there has probably never been a more difficult or important time for politicians and central bankers to ensure they navigate a very treacherous medium-term outlook. But what does this mean for investors?

Technological acceleration

There is no doubt that the way we consume, work, travel and communicate was changing long before the pandemic. However, many of the trends that have accelerated, such as home working, online shopping and increased internet usage, are here to stay. The UK equity market is not deemed to be technology heavy at a sector level, but every company now has technology embedded in their business. What really matters is how they use it to augment their business model. It is therefore important to own companies that come out of the pandemic in a stronger position than when they went in; companies such as clothing retailer Next1, with its superb online distribution model, Ascential, which optimises digital retail for the world’s largest manufacturers, and GB Group, with its strong position in online fraud and identity verification, fit this bill.

It’s the economy, stupid

We have just had the largest peacetime shock to the global economy on record and yet one would assume from the strength of markets that once populations are vaccinated it is business as usual. I believe nothing could be further from the truth and many of the weaknesses of the UK economy before the pandemic have only been exacerbated further. UK GDP fell 9.9% in 2020 – the largest decline in the G7 – with output expected to fall again in the first quarter of this year.

Given that more than two-thirds of UK GDP is domestic consumption, much of this reflects the rise in the savings ratio from 5% to as high as 28%. Of course, a substantial portion of that increase in savings has been forced as consumers could not spend and so the rebound in the economy will reflect the subsequent fall in the savings ratio as shops re-open.

However, the OBR expects GDP to grow at 4% in 2021 and return to its pre-pandemic level during the second quarter of 2022, a full six months earlier than it forecast in November2. In effect, the OBR assumes that we retrace back to the previous low levels of savings and consumers spend as they did prior to the pandemic. I just do not see that as credible as we will be in a period of higher unemployment – even accounting for the extension of the furlough scheme – and increased economic uncertainty. I believe precautionary savings will remain elevated and thus the ability of the UK economy to rebound quickly is very unlikely.

Furthermore, the recent budget laid out an additional £65 billion of support measures, with the settling of this £344 billion COVID bill only beginning to come in later years – namely through raising the tax intake to the highest proportion of GDP since the 1960s. This is likely to stunt growth prospects this decade, with investors still in the dark about the true level of permanent scarring

facing the UK economy. Another elephant is in the form of Brexit, which still lurks in the shadows. Although a thin trade deal was agreed with the EU, it remains to be seen how challenging the transition is for businesses. So overall, there remain a number of material risks that investors must remain cognisant of.

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