Active investment commentary & analysis

Business confidence remains fragile

News on vaccines has encouraged investors, but business confidence remains fragile. Planning involves a lot of uncertainty; management must predict the mood of other businesses and consumers, as well as risks in politics and trade. We can expect gradual economic recovery in the coming months, but actual business investment may lag.

In recent years stockmarkets have been detached from business investment, with low interest rates boosting financial assets but failing to lift business investment in the real economy. That takes confidence; clarity on future growth and taxes, and stability in politics and trade. Beyond the current focus on a vaccine and management of public health, businesses face major challenges with a return to work and must guess at the impact of higher unemployment and taxes.

Intervention to support businesses and jobs leaves a legacy of credit problems. Economic recovery often brings business failures as ailing companies are propped up until restructuring or sale is easier. Even well-intentioned government support, such as bank lending via Bounce Back Loans, may mask much deeper problems. How can rent holidays or other leniency on payments be unwound? It will take time for all these stresses to be unwound. Interventions bring their own challenges to business; it is hard to assess the financial strength of suppliers and customers. Getting to the bottom of bad debts will take time. It would be wrong to position portfolios for a rapid jump in the economy.

Economic resilience needs more equity investment to support longer term decision-making and cope with volatility.  Fortunately, government support for the economy is expected to switch towards infrastructure, public investment and tax incentives for investment. There is new potential for investment to target improving sustainability and resilience. There is a huge incentive for traditional businesses to accelerate an unwinding of their legacy and transform to fit the new economy.

There are big risks in businesses investing for a post-lockdown world. Businesses need a longer perspective to invest and expand. Genuine growth is likely to remain scarce.