In the words of Charles Dickens these are “the best of times and the worst of times” – the financial world is suffering severe labour pains but is also pregnant with possibilities. It appears that the East African business world is breaking early for Christmas but I am sure that all of us are desperately trying to predict the future for both our local economies and the world in general. Here in Uganda we are seeing a significant increase in Covid-19 cases which is, of course, in no way linked to the frantic and socially un-distanced political campaigns currently taking place!! Frankly nothing is certain except considerable uncertainty.
So if there aren´t any certainties then what are the likely economic and consumer trends for 2021?
It is inarguable that a world economy that was already approaching its peak pre-Covid-19 period has moved rapidly into recession. The effects of recession have so far been mitigated by an unprecedented degree of quantitative easing. This means that the full financial horror of the pandemic will not be felt until Q1/Q2 of the New Year. My personal opinion is that emerging economies in East Africa will recover more quickly than the established economies in the developed world because the level of systemic damage is so much lower. Clearly if our markets are Europe and the US then that is going to hurt us in sub-Saharan Africa but if our target markets are local then the effect will be far less severe.
I think that three economic trends, truths and threats will affect all of us and these are as follows:
- Higher Taxes – governments across the world have spent far more heavily than they budgeted and collected far lower taxes than they expected. This means only one thing – that they will look to recover shortfalls through higher tax collection. There also appears to be an acceptance that squeezing the lower level is not going to work and there will be a concerted effort, certainly in Europe and the US, to target the wealthy and their businesses. Particularly when investing it will be key to target investments that have efficient tax wrappers or exemptions.
- More Protectionism – many of the global investors that I speak to are reducing the scope of their investments to their local regions. Some of this may be an inability to travel but it is also because in times of trouble people value familiarity. If countries are also trying to increase their tax collections then it is likely that import taxes are likely to increase and trade wars intensify. Clearly this is not good news in East Africa where we already have a good deal of border tension and even closure. The one exception to this may be the United Kingdom which is desperate to prop up its economy post-Brexit.
- Cheap money but less of it – the cost of borrowing will remain low and may get lower but the challenged balance sheets of many of the banks and the large number of non-performing loans will mean that it will be more difficult to borrow.
Taxes, tariffs and reduced borrowing will all be existential threats in 2021 but what about the opportunities?
The last twelve months have influenced all of us to a greater or lesser extent and I think that they have changed the way that we view wealth, health and happiness. We can all hope that the world resets to a kinder, more generous and fairer base. In line with this new awareness of our own mortality and the world recession I expect to see real opportunities in a number of areas including:
- Wellness – the biggest single opportunity sector in 2021 is going to be anything that offers the consumer better health, fitness, energy, diet, sleep, or exercise. This offers a huge opportunity to anyone that can fit their offering into this space. For farmers organic will be essential, for restaurants plant-based food will be vital, and for anyone active in the medical marijuana space the future is especially bright. Additionally those who can offer life coaching, tele-medicine, exercise or any wellness support digitally (and therefore socially distant) will have a captive and motivated market.
- Distribution – all of those wellness products, supplements, plant-based food, running shoes, self-help books, cannabis oils, marijuana vapes and CBD sleep aids will need to be delivered. There are still nowhere near enough warehouses and distribution centres – particularly not in Africa which is coming later to the e-commerce arena.
- Med-Tech – falling interest rates and an increased awareness of our own mortality – plus the almost live-streaming of Covid-19 vaccine development mean that medical research and development is more main stream than ever before. Med-Tech has traditionally been the preserve of sophisticated investors who are risk-tolerant but I see that changing. The existence of crowd-funding platforms means that finance for medical research and development is more available than ever before.
- Rental Property – the dynamic in developed economies has changed and home-ownership is no longer a reality for many people. In developing economies there is also a shortfall of affordable housing and the pandemic is going to worsen the gap between rich and poor. In both scenarios the provision of social housing – housing designed to be affordable by those at the lower end of the income scale in areas of the country where there is access to employment (largely the cities) is acute. Whether purely as an investor into European government debt, or as a developer of affordable housing stock this area will be a growth market for many years to come.
As in all economic cycles there will be individuals and industries that flourish. In England we have a saying, “Every cloud has a silver lining”. Napoleon Hill wrote that, “Every adversity, every failure, every heartache carries with it the seed of an equal or greater benefit.” 2021 will be a challenging year but it will also be one that offers a series of great opportunities. Be of good heart and remember, “Fortune favours the brave.”
Jon Pedley is Chief Operating Officer, Investment Owl.
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