What has changed year on year?
It’s been exactly a year since I returned from an inspiring Europe trip, having attended the UK-Africa conference in London and the World Economic Forum in Davos. This seems an appropriate time to put together some of my thoughts on the important developments we face this year. There were tons of positive take-aways and then everything turned upside down very quickly. I wrote after that “I see us on the brink of a transformational decade” – how right I was! Not blowing my own trumpet, but it was a rather generic statement that we were on the cusp of an amazing decade. Let’s review.
I mentioned a shift in companies adopting ESG topics. Tick. This year I expect to see a further step in the right direction. For the first time ever the four largest economies in the world are aligned on climate change. I’m quoting my chairman Alastair Newton here. This should have a massive impact as governments set new regulations and frameworks, which are leading the way for companies adapting to the new landscape, changing business models and working towards achieving those goals in advance. The Biden administration put their green agenda into motion from Day One at the White House by joining the Paris Accord, stopping the Keystone pipeline project from going ahead and announcing a massive investment drive into electric vehicles. From a corporate side the answer came immediately for example General Motors has announced that they will phase out cars and trucks that run on combustion engines by 2035 whilst pushing boldly the electric vehicle space. Yet another example would be the net-zero carbon pledge, led by Amazon, which was signed by many global corporate leaders including Coca Cola, Nestlé, Microsoft, Unilever and others. It clearly shows increased awareness that the corporate world is on-trend. 30Thirty went 100% off-grid solar for our office last year and we also reduced our travel footprint (wonder why?).
There are some big shifts in social and governance matters. Movements like Black Lives Matter have shown the power of people movements while Me Too continues to put pressure on corporate governance and behaviour. It moved from Main Street to Wall Street at the beginning of this year, a trend to keep an eye on. Asset managers need to have a strategy, hedge funds now also need to be watchful of public investors, while corporates may feel the pressure from stakeholders more than ever. It may be the pent-up anger and frustration of people stuck at home with additional time at hand, I don’t know, but it’s a very powerful tool that has been used to pressure companies, investors or governments.
Last year I also debated about the power struggle between shareholders and stakeholders. There is no short answer. When I have to explain what we are doing as an investor I always say that we cannot be an impact investor if our investments are not profitable. The impact would vanish into thin air if it’s not supported by solid corporate profits and would disfavour every stakeholder in the chain. Sustainability has to be driven by financial success. Without a stable business the social and governance changes will not materialise. That’s not breaking news, it was taught years ago when I read Economics at uni. The first lesson in capital market theory was about the optimal allocation of capital, which is always a trade-off between returns and risks. There are more and less efficient allocations of capital and the optimisation of the two factors lead to the optimal portfolio. Stakeholders are risks for businesses if they are not correctly embedded into the business strategy. As I put it last year, “I can’t see this pressure fading in the near future”. That was most likely an understatement.
Now what are the trends we have to look out for this year? Unfortunately, I see a massive tendency towards protectionism. This is a dangerous trend, especially in times when it is of utmost importance to have cross-border collaborations, economically, environmentally and obviously also in health. Whether it is suppression of human capital movements, the blocking of vaccine exports or technology trade wars, it will increase uncertainty in the business environment and possibly reduce investments and innovation. I see economic stagnation and disruptions in many developed economies for many years ahead. Those who were struggling to grow before won’t have a simpler time growing in the near future.
I also see the tech transformation driving massive social changes. Again, we are not sure what the long-term outcome will be. Does it lead to emptying out of high-streets and city centres? Will the gig economy be a sustainable support to changes we have gotten so used to? Many articles I read are suggesting so. It is believed that the transformation in our way of working will sustain and therefore transform how we live, work and spend our leisure time. I believe that we will eventually get back to the office, but probably only for part of the working week. Humans are still social animals and the major benefit of a conference is the networking part, which is difficult to do properly via Zoom.
Governments around the globe have amassed a record number of debt as did corporates. The amount of money that has been printed is unprecedented, there is bound to be long-term implications. Who will pay for it? Today’s debt is super cheap, but we know that governments are notoriously bad at repaying or reducing debt. Will debt wipe out some countries when they have to roll-over that debt a few years down the line?
One of the critical points to ensure is that the money raised should be used very efficiently. Propping up companies that are in a bad shape is inefficient. I assume that many of those companies that have been put on life support will go under in the near future.
Having said that, never has the world seen as many start-ups mushrooming. The pandemic has galvanised the entrepreneurial spirit in the population. This means that new capital goes to new ventures and ideas. This is a very exciting trend.
I can’t leave you without mentioning the African continent. What I see on the ground may not be representative of all the countries. In Zambia, the lockdown was short lived. People were quickly back hustling. We suffered other massive issues, such as the excessive currency depreciation, the government going into debt default, which logically should be eroding the trust level of investors, leading to increased cost of borrowing.
A good number of businesses have suffered. Survival was the first battle and recovery will be the next. Other than in Europe there were only little support mechanisms available – or in most places none at all. If you read my comments above, this may not be a bad thing as companies that will survive this situation would have proven that they deserve to be around. I talk daily to entrepreneurs from different fields, pitching their businesses or ideas to me. It is not dissimilar to the developed world. There is a big disparity between private and public sector. But government’s duty is to put solid frameworks in place so the private sector can flourish within a stable business environment. Setting a visionary long-term agenda and establishing the trust with stakeholders will bring confidence to investors, government donors and development institutions alike.
From an investor’s view, even though we are very confident about the year ahead, I don’t think that it will be an easy year for every investor. There are great deals out there, but they have to be sourced and executed successfully. And in this environment not everything that looks like a bargain will turn out to be one.