The economic fallout from the coronavirus crisis could be every bit as bad as the early years of the 1980s, according to Simon Edelsten, manager of the Mid Wynd International Investment Trust.
However, Edelsten pointed out that despite his “dark memories” of this period, it was actually a great time for investors to get into the market.
Performance of index in 1980s
Source: FE Analytics
The UK unemployment rate stood at 4.5 per cent – or 1.5 million – in the three months to August, according to data from the Office for National Statistics. Yet there are fears this figure will rise as coronavirus cases begin to climb again and the prospect of another nation-wide lockdown becomes more likely.
Edelsten said that when he and his team are faced with challenges, they often resort to looking back at the lessons from history, meaning the recession of the early 1980s “when you had businesses closing and unemployment rising every week”.
“When Margaret Thatcher came to power in 1979, after the ‘winter of discontent’ when rubbish was pilling up, people thought things couldn’t get worse,” he began.
“But her policies to try to control inflation meant that interest rates were kept very high. And although the public had been shocked when unemployment in the UK went through 1 million in Ted Heath’s day back in 1972 to 1973, when Mrs Thatcher came to power, it had already got to 1 million.
“It then went through 1.5 million, through 2, and ended peaking at 3.25 million, putting enormous pressure on her and leading to doubts about whether her economic policy was wise.”
Edelsten noted that Thatcher’s government is still remembered for denying struggling businesses subsidies and aid packages, even if this meant they had to lay off large numbers of employees. As a result, large sections of the British manufacturing industry, particularly in the West Midlands, went under and never recovered.
Yet the manager said this doesn’t tell the whole story.
“First, a number of businesses were getting government help,” he explained. “Notably the Nissan plant – which is still said to be one of the most efficient in the world – was opened in Sunderland in 1984. Just after that, a large number of people who had worked in the shipbuilding industry on the Tyne went to work in laser manufacturing and started that highly competitive part of British manufacturing. So the green shoots of that new wave were there.”
Edelsten said this was also the start of the UK’s ‘knowledge economy’, adding that while the Conservative government of the time was associated with allowing industries to fail, “one extraordinary story from this time” was that it backed the nascent computer industry.
For example, Margaret Thatcher appointed Kenneth Baker as the UK’s first Minister of Information Technology in 1981 and authorised subsidies for British computer manufacturing, including the unfairly maligned Sinclair brand.
“You may all remember because he [Clive Sinclair] bizarrely thought that at some point people would be driving electric cars – a little ahead of his time, it has to be said, and his car was not quite like the ones that we drive today,” Edelsten continued.
“But at one point in 1983, the ZX81 Sinclair was the biggest selling home computer in the world, certainly by number. The government also pushed the BBC to design its own computer, and to run a set of shows to educate people on how to programme one, so the BBC Micro was born.
“The BBC Micro was built by Acorn Computers in Cambridge, so perhaps that government subsidy might have been the seed of many very successful computer businesses around there, not least ARM Holdings which has just been sold by SoftBank for $40bn.”
He added: “So even in an economic crash, it’s always worth keeping an eye out for the green shoots of the next cycle: which businesses the government helps to grow and which businesses the government decides there’s no future in.”
Edelsten said two growth themes that have come to the fore in the crisis and are likely to run for many years are sustainability – with renewable energy likely to be a major beneficiary of government spending to support the recovery – and working from home.
However, he prefers to pick up stocks slightly outside of the spotlight, so rather than investing directly in wind or solar farms, he is playing the theme of sustainability through efficient air conditioning companies such as Trane in the US and Daikin in Japan, both of which have done well recently.
“We were keeping an eye on them because more energy-efficient buildings were identified already as being something that the world needed to move towards,” he said.
“Then along comes the pandemic. Now if you’re in a tower block, you also need to clean and change your air much more frequently, so demand for advanced air conditioning has gone through the roof.”
And with some work-from-home stocks looking “faddish”, Edelsten said he is investing in a parallel theme of more efficient offices.
“We’re looking at other things which we think are going to be permanent sources of change, such as companies that might benefit from allowing us to do more of our interactions with the government online and helping them stop relying so much on paperwork,” he said.
“It may surprise you, the UK is quite well ahead today. Other countries are a long way behind, with people spending a lot of time queuing up at town halls filling in forms, sending off paper documents, faxing things and using old fashioned signatures. And none of that seems viable really.
“There’s a lot of work to be done and it’s important to keep looking forward.”
Data from FE Analytics shows Mid Wynd International has made 169.22 per cent Edelsten became manager in May 2015, compared with gains of 109.31 per cent from the IT Global sector and 105.95 per cent from the MSCI AC World index.
Performance of fund vs sector and index under manager
Source: FE Analytics
The trust is on a premium of 2.34 per cent compared with 2.95 and 2.32 per cent from its one- and three-year averages. It has ongoing charges of 0.66 per cent. It is not currently geared.