CIO update: Winning the peace

Ever since the outbreak of the pandemic, the world economy has essentially been on a war-footing, involving the deployment of previously unthinkable amounts of fiscal and monetary stimulus. Now, as COVID-19 begins to retreat – albeit with some notable exceptions – it is time to win the peace.

The global response to coronavirus has brought about lasting changes to the way we live, work and play, accelerating trends that would otherwise have unfolded over the course of years in a matter of months, with momentous implications for investors. The increasing dominance of the tech sector, driven by remote working and e-commerce, is a striking example of this phenomenon.

It is our responsibility as stewards of our clients’ capital to seize the opportunities and manage the risks presented by a post-pandemic future, identifying the companies and asset classes we believe will emerge as relative winners.

We also need to tackle the critical environmental, social and governance (ESG) challenges highlighted by COVID-19 – from access to healthcare, to income inequality, to the risk of a climate catastrophe. Indeed, we believe that due to the financial materiality of ESG factors, both objectives are inextricably linked: only through responsible investing can we generate long-term returns for our clients.

In our new CIO spring update, investment teams from across LGIM examine these themes in greater detail. Our conclusions include the following key points:

• Climate risk means some companies are increasingly likely to struggle to access capital

• Reports of the ‘death of the office’ have been greatly exaggerated

• Risk assets are likely to grind higher, albeit with a fair amount of volatility

Other issues addressed are the battle faced by the Biden administration in delivering on its vast investment plans; the likely shift in investor attention towards inflation risk and stimulus withdrawal; and how pension schemes could become more resilient ahead of the next market shock.

Energy and urgency

The overall theme of our spring update is “heating up”, in a not-so-subtle reference to both the global economy and our planet.

In the run-up to COP26, the climate change conference later this year in which LGIM is participating, some governments are making admirable commitments to cut emissions. But given the extraordinary fiscal action taken during the past 12 months, the budgetary headroom to support these measures – whose cost will run into the trillions – is meagre at best.

Tough regulation and a truly global approach can do some of the work. But much of the heavy-lifting will ultimately need to be carried out by the private sector, in our view, with the same energy and sense of urgency with which it handled COVID-19.

This is where the asset management industry can play a crucial role, by expediting the transition to a low-carbon economy through the capital we invest and manage on behalf of our clients. At LGIM, our purpose is to create a better future through responsible investing. Averting the looming climate crisis is central to this mission.