“Our Patience will achieve more than our Force.”
Edward Burke, Irish political philosopher and statesman
Patience is a virtue, or so they say. After years of discussions but little in the way of progress, the coronavirus pandemic has spurred the cash-strapped G7 countries to finally agree a firm tax plan for the super-wealthy tech giants. Now they will pay tax where their revenues are generated rather than where their headquarters are located, generally in a low tax haven of their choice.
The companies most likely to be affected by this are the large US tech companies, who have historically made huge revenues, but paid insignificant amounts of tax in comparison.
It is an important step not only for disgruntled nations who have felt cheated but also for tax fairness and for all non-multinationals who are unable to get away with such tax liberties. However, let us not get carried away. It is not the end of the battle. Lots of details have yet to be thrashed out and the next step for the proposal is the July meeting of the G20. Ireland, with a low taxation regime of 12.5%, which many companies take advantage of, is likely to be an obstacle to the agreement although initial media reports suggest they are open to a compromise.
Rishi Sunak, the UK Chancellor is hoping that the eventual deal will mean that the UK’s share of the tech windfall is a “huge prize for UK taxpayers” and will help to pay for the enormous cost of the coronavirus pandemic.
A related story emerged from the apparent leak of IRS tax returns of many of the wealthiest Americans, published by ProPublica. These unverified claims state that some of the richest people in America can use a variety of methods to drastically shrink their tax contributions, resulting in a tax rate against their income lower than most Americans. Many of these billionaires were “Winners” of the coronavirus pandemic which saw their wealth grow colossally as economies shut down and quantitative easing boosted asset prices. Jeff Bezos, CEO of Amazon, saw his wealth grow by almost $100 billion and reported an income of $4.22 billion, yet paid taxes of “only” $973 million. A true tax rate of less than 1%. Other famous names such as Elon Musk of Tesla, Michael Bloomberg of Bloomberg Inc and Warren Buffett of Berkshire Hathaway were able to legitimately manipulate their true tax rates to as low as 0.10% on incomes in the $billions and wealth growth in the tens of $ibllions.
Credit Suisse reports that aggregate global wealth accumulated by households during 2020 rose by about $28.7 trillion and more than 5 million people became dollar millionaires for the first time despite the pandemic. It is estimated that there are now more than 56 million dollar millionaires globally.
This unimaginable growth in wealth is partly because of quantitative easing, (QE), or bond buying by central banks. QE was unleashed in the US and the UK more than a decade ago, followed by the European Central Bank a few years later. It has saved economies and markets from recessions and crashes by flooding the financial system with excess liquidity and keeping interest rates, and the cost of borrowing, at historically low levels. Yet this ‘extraordinary’ measure has never really been reeled in and it was even expanded during the coronavirus pandemic. QE helped to prevent mass unemployment and bankruptcies but undoubtedly also helped to make the super wealthy even wealthier.
The outlook for finally overcoming the virus now depends upon the efficacy and availability of vaccines. It has been more than a year since the World Health Organization declared Covid-19 a pandemic. Looking back, it has been an extraordinary period in all our lives. Our world has changed. But the devastation of the pandemic has also given rise to unprecedented scientific advancement as we have risen to the challenge. In less than a year, several highly effective Covid-19 vaccines have been developed, approved, and delivered. Mass vaccination is well advanced in many parts of the US and Europe, and concerted efforts from rich countries to help vaccinate the rest of the world are crucial in the race to bring the pandemic and variant epidemic outbreaks to an end.
The pandemic is as fast-moving as the response. The first vaccines have succeeded in halting its progress, but we now face rapidly emerging variants and the likelihood that boosters will be needed to maintain protection but as we gradually get back to normal life and back to reality, there are opportunities everywhere. A pandemic is among the shortest, sharpest exogenous shocks that can occur. People want to get back to work and to enjoying themselves, closed activities and projects are restarting, and there is significant pent-up demand for almost all types of goods and services.
The delay to the promised full reopening of the economy and final lifting of lockdown restrictions in England, postponed to allow the Government chance to outrun the highly infectious Delta covid variant, was greeted with a fair few boos and hisses, but it wasn’t entirely unexpected.
The news was a particular blow for the millions of people looking forward to finally picking up their social life again and especially for workers who are compelled to wear facemasks all day because of the nature of their jobs, but it was even worse news for businesses in sectors such as hospitality and travel. They expected to be crossing the pandemic finishing line on the 21st June but instead, they now face a potential £3 billion hit to revenues, plus higher furlough and business rate costs.
The postponed full reopening is unlikely to make much difference to the broader economic rebound this year but coming at the point when many businesses are announcing their plans for future working arrangements it will reignite the debate about pandemic winners and losers.
The stock market, for the most part, took this announcement in its stride, although hospitality and travel stocks saw yet another downward lurch, with the additional complication of certain government assistance schemes also nearing an end.
The goalposts have shifted once again due to the rapid spread of the new Indian, or Delta, variant of the disease. Cases have begun to rise, but hospitalisations and deaths remain low due to the widespread uptake of vaccines across the most vulnerable of the population. Virtually all the 31 plus million most at risk have now had their second vaccination, but the three-week delay for maximum efficacy will not yet have reached many. Realistically though, within the next month, the best possible protection will have been extended to the most at risk, and arguments against re-opening the economy will lose their force.
In stark contrast to the UK, New York City recently celebrated the complete lifting of Covid-19 restrictions with a massive firework display in honour of essential workers who worked tirelessly to help the city through the pandemic. Conversely, the UK has had to postpone the lifting of restrictions out of prudence because of a surge of infections among younger people but the full reopening of our economies and the return of normality is thankfully now a question of when not if.
In the meantime, economic recovery has been surprisingly robust. Unemployment and retail sales readings continue to show further improvement even as inflation ticks higher exasperated by some bottlenecks in the supply chain. Figures released recently by the Office for National Statistics showed that the economy grew in April by its fastest monthly rate in over a year. Gross domestic product (GDP) expanded by 2.3% following 2.1% growth in March. Over the year GDP is up 27.6% although the UK economy is still 3.7% smaller than it was in February 2020 before the pandemic and its related restrictions kicked in.
Like well-disciplined children, stock markets continue to be well behaved and as expected the emphasis has been on companies that will recover sharply after their businesses were shut down or badly impaired by anti-pandemic measures. However, talk has once again returned to when central banks will reduce their appetite for government bonds and wind down their money creation. When might they venture a small rise in interest rates? The central banks, led by the US Federal Reserve, have been clear that they think the upturn in inflation will prove transitory.
They plan to hold firm on their policy of printing more money and keeping bonds expensive. They want to keep interest rates low to ensure that this time there is a stronger and more lasting recovery than was managed in 2010-12 after the 2008/9 global financial crisis. The Fed has resolutely said it is sticking with its large bond-buying programme, despite the obvious signs of much faster money growth in the US than other leading economies and good signs of a strong economic recovery.
Stock markets seem to have accepted this rhetoric although they are prone to bouts of volatility on inflation fears. The Fed leads the conversation on price rises, claiming that there are well-defined shortages of raw materials and goods such as semi-conductors which will drive up prices in the short term, but which will be corrected by more capacity in good time.
Officials state that inflation expectations are still well anchored. They want to run the US economy hot, with inflation above 2 per cent for some time. So far markets seem to buy the idea that the big surges in the price of oil, steel. timber, building materials, electronic chips, copper, and other basics reflect short-term shortages that will ease and accept that wages and other prices will remain constrained.
Stock markets, for now, seem convinced and remain relatively calm. A recent report by the Boston Consulting Group adds credence to this feeling of optimism. They predict that the global stock of financial wealth will grow in the next 5 years from $250 trillion to $315 trillion powered by increases in North America and Asia with Europe lagging. BCG “see signs of emerging economic recovery that could significantly expand prosperity and wealth between now and 2025”. Although an increase of 25% over 5 years does not seem particularly exciting and is slower than the increase of 35% in the five years to 2019, it is still fast given that the global economy has yet to see the end of the pandemic, let alone a complete recovery.
As always there will be Winners and Losers so picking the winners, and avoiding the losers, is likely to deliver higher returns. Active fund managers of the pedigree used by Clarion Wealth should continue to do well in this environment.
In the meantime, opportunities to make, and lose money, abound.
The army of “Reddit” investors, who earlier this year fired up downbeat stocks in companies including GameStop, Blackberry and cinema operator AMC Entertainment, recently propelled shares in healthcare company Clover Health up by more than 250 per cent from the start of the year to a recent peak earlier in the month. The company, which provides Medicare insurance plans went public earlier this year and became a favourite among retail investors on the online forum Reddit where discussions about the stock tripled in a week. But the company is yet to make a profit. The experience of GameStop, where some investors saw their investment cut by two thirds in a matter of days, and painful losses on Bitcoin, seem to have been ignored yet again in the pursuit of a quick profit. At Clarion, we prefer to grow the wealth of our clients more slowly and more surely.
With much talk in evidence of the rotation into value, investors will be forgiven for thinking little else has come to matter but in some ways, the tech revolution has only just begun. There are lots of traditional industries that, so far at least, have largely been untouched by any form of technological revolution. Music, publishing, television, and more recently groceries, transport, and finance, have seen wave after wave of transformation. Many others have remained largely unchanged since the 1950s or even earlier. But all of that seems about to change.
Over the next few years some very basic industries, such as eating out, going shopping, or even getting a haircut, are about to go through their own cycle of disruption. If Dickens walked into a barbershop today, he would not think much had changed. Along the way, lots of old companies will get wiped out and a few far bigger ones will emerge. We often think we are living through an era of rapid innovation but in fact, it is only just getting started, the real disruption is still to come. For example, Tesla recently extended its trademarks to cover restaurants and hairdressing with plenty of speculation that it plans to add food and a quick haircut, pre-booked of course, to its supercharging stations.
Last month Amazon launched its first hair salon in London and Apple has hinted it is planning to expand its range of expensively designed outlets across Europe, not to sell anything but to allow its customers to try out and test its product range.
The reality, of course, is that there will be shortages of labour and goods as furlough programmes roll off and supply chains are restarted, and there will be spikes of inflation where supply is not yet able to cope with resurging demand. There could also be a slowdown next year when growth will slow or turn negative as it annualises the strong growth of this year. But these are short-term, temporary effects. They are caused by economic recovery and are to be welcomed as a harbinger of the return to growth and prosperity. Governments and central banks are fully aware of these dynamics, and there is no reason to believe they will not do what it takes to balance the normalisation of fiscal and monetary policy with the need to support the recovery and offset short-term effects.
History suggests it remains wise to maintain portfolio balance and that for long term investors, market volatility is not a risk but an opportunity to buy more for less. Market sentiment is often fickle and can distract. Remaining focused on the fundamentals of the investment is the key to the successful management of portfolios over time. And now is no different. Recent volatility and market rotation between value and growth, which has likely come to an end, has allowed our fund managers to add to positions in their favourite stocks at much lower prices than before.
The month of June also brought forth another anniversary. It is now 5 years since the UK voted to leave the European Union. After an initial hit that was much worse than Brexit’s proponents forecast, followed by years of political chaos that shook the country to its foundations, the damage is looking rather more limited than the “Remain” supporters predicted. There is still a long journey ahead on the road out of Europe and it is still far too early to say whether the country will change for better or worse, but the UK is showing signs that it could be an interesting investment opportunity. It is also set to be a fascinating testing ground for post-Covid economic effects as countries emerge from the pandemic. Recent take-over bids by international conglomerates and large private equity groups of some traditional and successful UK companies clearly demonstrate that the UK is on the shopping list of many an entrepreneur. We must hope for inspirational leadership to make the most of the opportunities that lie ahead.
As always, we wish all our clients, their families, and friends the very best of health and good fortune as we look forward to an eventual return to normality and a life of freedom. Our office is now open and is Covid safe and secure, for both staff and clients alike. We are back to business, and we look forward to welcoming you to the familiarity of face-to-face meetings in Overbank in the coming weeks and months. We are, of course, available for contact via the office number, email address and all normal forms of communication. As always, please do get in touch if you have any questions.
We look forward to updating you regularly over the coming months.
Keith W Thompson
Clarion Group Chairman
Creating better lives now and in the future for our clients, their families and those who are important to them.
Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.
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