Stock market investors may not agree on the right price for a stock, but nevertheless share a common interest in the idea that price matters. But, in the post-lockdown world, money may matter less. Perhaps with shortages, rationing, business interruption and more political intervention. Are investors prepared for this challenge to their core beliefs? How can analysts assess non-price risks that may not be fully captured by ESG?
Surveys of investor fears are currently remarkably consensual - possibly indicating a lack of imagination. The worry list is very much seen from the perspective of things the financial sector feels they have control over, or at least central banks do. Inflation, deflation, yield curves and taper tantrums are top of the anxieties, with a sprinkling of geopolitical issues on the list.
But the illusion of control is not just a behavioural pattern of investors. Governments have emerged from the pandemic with new confidence that they can deal with anything. And even if they overestimate their abilities, they think PR will fill the gap. Politicians now seem to believe that the public trusts them to intervene for collective good, irrespective of traditional positions on the political spectrum. Other than in financial terms, the pandemic has been a great leveller. These major existential events typically have generational impact on social and political thought. Stock market investors may focus on what the lockdown experience means for how consumers think about their houses and gardens, but the broader political change is yet untested.
With the current investor focus on sustainability and resilience, it is easy to think that ESG will address all this. But governance itself has often failed to prevent profit warnings, strategic errors or company failure. Utilities tend to be masters at dealing with the changing political landscape but it does not come easily to some other sectors. If history teaches us anything it is that governments will take short-term action and intervene in any area if driven by political imperative. Or even just if they think they can get away with it.
Only investors with long memories will know what the 1970s really felt like - particularly in the second half of that decade as attempts were made to bring down inflation. When prices were out of control they were not seen as a fair mechanism for allocating many essential goods and services. Now, with easy money we have newly empowered governments that are more likely to question market prices as the best route to allocating scarce resources.
Governments typically fear only the press and the bond market. The first is not currently the problem it was - the public mood is more tolerant of intervention. And there seems little sanction on economic management or public borrowing, with credit markets dysfunctional in the face of asset repurchases and a tidal wave of liquidity. The only discipline left might be currency, but it has been several decades since governments feared devaluation. We can expect governments to make more use of this new freedom.
Stock market investors are currently enjoying good performance but should recognise the landscape is uncharted territory. Many metrics that worked in a normal functioning economy are now distorted. And, as we have seen with intervention on rent recovery, almost any sector can have its economics turned upside down. The unwinding of forbearance has still to be tested.
Overconfident government is a new challenge for stock markets. The obvious sector targets are areas such as property, transport and food but there may be broadly based intervention in employment. Not all companies will respond well to direction on hybrid working, for example.
Investors need more broadly based conversations with company managements to spot some of the potential for friction and business interruption. And there is need to scan the horizon more widely than the financial press to understand the new risks. Companies are facing a period in which profitability may be determined less by price. The lockdown legacy may be bigger government.
A version of this article was published in CityWire on 16.07.2021.