Colin McLean: Business normality may not fully return for several years

Stock markets are themselves often just a sentiment reading. Investment professionals are in uncharted territory, evident in this year’s stock market rollercoaster. Few have much knowledge of medicine or pandemics, and so news on vaccines is liable to misinterpretation. What seem to be precise numbers on efficacy in a major trial may tell us a lot about the benefit for those more likely to experience mild symptoms, but little about hospitalisations and pressure on health services. Public policy is built round protecting the vulnerable and we can expect this to continue until a broader reduction in virus transmission is achieved. The new vaccines may be a bridge to that but not a full solution. They bring forward the prospect of more normal times, without giving businesses much to work on.

In recent years, stock markets have been detached from business investment, with money printing and low interest rates boosting financial assets and property, 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.

Adding to uncertainty in the business environment are issues of business fragility and bad debts. Intervention to support businesses and jobs will leave 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. A myriad of current economic distortions cloud business analysis. How can rent holidays or other leniency on payments be unwound? Are the creditors who cannot collect strong enough to bear this and can balance sheets and company accounts be trusted? It will take time for all these stresses to be unwound. Business normality may not fully return for several years.

With a risk that interest rates will turn negative – further distorting the economy – businesses may feel a false sense of security in borrowing. 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. Pointing to how investors now view the need for change, Denmark’s largest alternative energy business, Orsted, is now valued more highly than BP. There is a huge incentive for traditional businesses to accelerate an unwinding of their legacy and transform to fit the new economy.

The pandemic has triggered much-needed government support, propping up businesses that would otherwise have failed. That will be followed by new stimulus – probably even more than in the aftermath of the financial crisis. But these 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.

Customer tastes have changed, but not all that demand will be permanent. There are big risks in businesses investing for a post-lockdown world. Certainly, sectors such as travel and hospitality will rebound in 2021, but there will be costs in re-marketing. Scotland’s tourism has relied on a lot of festivals, which may not return to the calendar until 2022. Science has delivered a remarkable result, but the stock market may be taking a rose-tinted view of the economic outlook. Businesses need a longer perspective to invest and expand.

Colin McLean is managing director of SVM Asset Management