Where do we go from here?

The advancement of technology and the data/digital age has accelerated in 2020. The world has embraced more change more quickly that it might have, due to the global lockdowns. Governments and corporations around the world will have adapted and up graded their systems and processes that are more automated leading to new and growing opportunities for investment and progress. The traditional industries lagged in 2020 until the vaccine announcement restored their potential and a rotation to undervalue started. This will not slow the march of technology but restores the well-being of other sectors.

The next great accelerating transition will be the move from carbon energy to clean energy. Many major corporations are signing up to the Paris Climate Agreement on cardon emissions with a pledge to be carbon free by 2050. With the US set to return to the Paris Accord and the Biden Administration wishing to make big investment in greener carbon free energy then this sector is set to accelerate. The traditional oil companies are starting to see the end of oil and develop their businesses to be renewable energy providers. It is for this reason we have introduced to all our portfolios the iShares Global Clean Energy ETF as our access point to this sector.

As part of the clean energy agenda, the ending of new diesel and petrol car sales in the UK by 2030 will in itself bring about important investment. The UK will need to move forward in the infrastructure of recharging points and the building of massive battery factories. The UK is falling behind in the commissioning of these so called giga factories. This year the US has approved 3 giga factories, Europe approved 2 and China 38. If the demand grows as expected, the UK will need at least four built over the next five years. South Wales is hoping to be first to host a UK giga factory making electric car batteries. Without investment we will be relaying upon foreign business and imports from Tesla, Panasonic, Samsung and LG.

The global lockdowns ensured that business supply chains were reassessed. Shorter supply chains with lower carbon foot print are growing in attraction. The world requires trade to create growth and so post Covid is not the time for protectionism, isolationism and trade barriers. With this in mind fifteen countries in Asia have now formed the world’s largest trading block covering nearly a third of the global economy.

The new Regional Comprehensive Economic Partnership (RCEP) is made up of South Korea, China, Japan, Australia, New Zealand and 10 other South East Asian nations. The RCEP has taken eight years to negotiate and aims to eliminate a range of tariffs on imports and give rights over intellectual property, telecommunications, financial services, e-commerce and professional services.

This is the first time that China has signed up to a regional multi-lateral trade pact and is seen as China seeking greater influence in the region. China’s involvement in the RCEP may be a play to reduce US influence over Japan, who would be a key partner to the US and EU in tackling China about IP theft.

In the spirit of global free trade, we hope that the UK and EU will finalise their agreement in time for mutual ratification and implementation ahead of the end of the transitional period on 31st December. Both the UK and EU need to move on with their relationship. With ambition and mutual respect, the new status could flourish and aid our economies. The ratification of a UK/EU trade deal will assist the UK in further agreements, not least with the Biden Administration. Mr Biden has made his views clear that he wants to see a UK/EU deal that protects the Good Friday Agreement before engaging with the UK. Europe will be happy that Joe Biden is in the White House and that efforts will be made to ease trade tensions and work together to tackle China’s influence.

One of the lasting features of any global crisis is the build-up of massive government debt. The UK now has over £2tn of public debt with the first lockdown and government support packages costing £330bn and the second lockdown and the extension of the furlough scheme to March 2021 costing a further £150bn in borrowing. Public sector net debt excluding public sector banks hit an all-time high of £2.06 trillion in September 2020. That equated to 103.5% of GDP, the highest as a share of the economy since the 1960-61 financial year, as the government stepped up efforts to support the economy hit by the pandemic. Gilts made up the largest component of debt. At the end of September, there was £1.74 trillion of central government gilts in circulation including those held by the Bank of England (BoE) Asset Purchase Facility Fund.

Britain is certainly not alone and the next great post Covid challenge will be how the world deals with these massive debt levels. Part of that solution is a shift to a more inflationary world as governments maintain QE programmes and simply print money to fund public spending. With an ever-growing money supply and a recovery in activity post vaccine, we could see the return of inflation. This will have an impact on fixed interest securities as bond yields will rise to attract buyers and in doing so prices will fall. This may then start a bear market in bonds. Stock markets will like some inflation and rates of 2% would be useful for price rises and profits but higher inflation rates would be a concern.

With interest rates set to remain very low in the developed world for many years to come in order for governments to be able to maintain their debt repayments, unemployment set to rise in 2021 and recessionary pressures in the near term, the immanency of an inflation threat is relatively low. What will be certain however is that as liberty and activity are restored then so will taxation rise in order to start to restore public finances.

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