As the pandemic reaches what we hope is its endgame, millions of us are keen to get out to the coast. This weekend it has been the turn of the leaders of the G7 countries – who have made the dash down to Cornwall.
Along with their pasties, they have been digesting policies including minimum corporate tax rates and the tricky winding down of coronavirus support schemes.
The G7 is as much symbolic as it is decisive. As Darius McDermott, managing director of Chelsea Financial Services, points out, the discussions have been ‘fairly scripted and indications of intent rather than any specific legally binding agreement’.
Leaders: Boris Johnson and Joe Biden discussing the way forward in Cornwall
For investors, though, the meeting has offered clues about the direction of travel for global economies. The first major conference of world leaders since the pandemic hit has met under the banner Build Back Better – referring to everything from rebuilding economies post-pandemic through to environmental sustainability.
The themes covered by the summit could create plentiful opportunities for astute investors, especially in areas such as infrastructure and environmental funds.
WHAT IS THE G7 – AND WHAT DOES IT DO
The G7 is regarded as a steering group for Western economies. The decisions and discussions at this weekend’s summit will act as a catalyst for measures taken at national level. Yet the summit can’t pass any laws and excludes some hugely influential nations.
Justin Trudeau of Canada; Emmanuel Macron of France; Angela Merkel of Germany; Mario Draghi of Italy; Yoshihide Suga of Japan; Joe Biden of the US; and Ursula von der Leyen of the European Union have all been present to represent their respective economies. But there has been a notable absence of leaders from Russia and China.
Russia is no longer in the G7 due to its invasion of the Crimea in 2014. China doesn’t count as a sufficiently advanced economy to join due to its relatively low income per head – despite its recent rapid economic growth.
Alongside G7 members, guests from Australia, India (attending virtually), South Africa and South Korea have also been invited.
WHAT HAS BEEN ON THE MENU AT THE SUMMIT?
Along with Cornish seafood, cream teas and St Eval chocolate, there has been plenty for G7 world leaders to chew over.
One major theme has been a sweeping reform of the world tax system, with G7 finance ministers backing a global minimum tax of at least 15 per cent on profits made by multinational companies.
Keith Bowman, equity analyst at wealth manager Interactive Investor, says that the tax move has been driven by the ability of multinationals – particularly tech giants – to move their home tax residency to minimise their bills. ‘This has now forced governments to collaborate on tax rates,’ he adds.
Andrew Bell, who runs stock market-listed Witan Investment Trust, says the tax decision represents ‘a positive step’. He says: ‘Nobody wants taxes to stifle innovation or weigh on economic recovery, but ultimately popular spending plans have to be paid for. A sense of fairness is vital for popular acceptance of tax levels and the spending tradeoffs governments have to make.’
Winding down coronavirus support schemes without stifling economic recovery has been another major theme. Janet Yellen, US Treasury Secretary, set the tone, suggesting that countries should keep spending – not just maintaining coronavirus support schemes for businesses, but by following the US lead in sustaining massive economic stimulus policies.
Kevin Doran, chief investment officer at investment platform AJ Bell, says that any such government spending will have to be paid for eventually. He explains: ‘The most significant concern ought to be just who will finance this largesse, especially when consumers are released back into the wild again and household savings return to more normal levels. Longer term, the determination to deliver ‘new deals’ and promises of new jobs may come at a cost.’
Tax and economic stimulus represented substantial G7 starters. But the main course for the G7 was all about environmental commitments. In his inaugural speech Boris Johnson – despite arriving at Carbis Bay by private jet – linked the climate agenda to economic growth and stimulus, stating that G7 members ‘are united in our vision for a cleaner, greener world’.
He said a green technological revolution has ‘the potential to generate many, many millions of high-wage, high-skill jobs’.
The spotlight is now on further tax incentives for green businesses, as well as tighter reporting requirements for companies on their sustainability criteria.
Jason Hollands, a director of wealth manager Tilney, says: ‘The focus on reducing carbon emissions is already permeating economic policies, such as those aimed at increasing the use of renewable energy and the phasing out of petrol and diesel vehicles.’
Finally, the equitable distribution of Covid-19 vaccines has been a fraught topic, as countries race to vaccinate their own populations. The G7 is pledging a billion vaccine doses for poorer nations.
Nalaka De Silva and Jennifer Mernagh are joint managers of investment trust Aberdeen Diversified Income and Growth. They warn that without vaccine programmes in place worldwide, many emerging market nations will struggle to recover. ‘A global vaccination drive is critical to tackling inequality,’ says De Silva. ‘It will ensure that countries get widespread access to vaccinations so that they can also benefit from any upswing in global growth.’
HOW INVESTORS CAN BENEFIT FROM THE G7
The themes discussed on a global stage may seem broad, but they will impact on the performance of individual companies. Hollands says: ‘Investors should see G7 as a reminder of the international drive towards environmental sustainability, the focus on infrastructure investment as economies are rebuilt, and an emphasis on increased international coordination. All with the US at the steering wheel.’
For investors hoping to benefit from the push towards environmental sustainability, Hollands suggests that investors look at funds such as Impax Environmental Markets. This fund invests globally in companies that provide environmental solutions, including clean energy, energy efficiency, natural resource management and sustainable agriculture.
Meanwhile, investment funds with a focus on infrastructure could benefit from the objective to ‘build back better’. Hollands likes Renewable Infrastructure Group, an investment company listed on the London Stock Exchange with a portfolio of more than 75 renewable infrastructure projects – solar and wind farm based – in the UK, France, Germany, Sweden and Ireland. Chelsea’s Darius McDermott says that broader infrastructure funds could also do well, suggesting M&G Global Infrastructure and Gravis Infrastructure Income. The Gravis fund provides shareholders with an income equivalent to five per cent a year. It invests in a portfolio of listed infrastructure groups including those related to renewable energy as well as healthcare.
McDermott also suggests that progress on the Northern Ireland protocol could spell good news for UK investors. ‘The UK stock market still has a Brexit discount on it,’ he says, ‘so a breakthrough on this issue would lead to an increase in market confidence.’
Mood music over Northern Ireland has been mixed, with Johnson insisting ‘complete harmony’ with Biden on the issue, but a no compromise stance has been taken by Macron. Johnson said there was an ‘indestructible’ relationship between the UK and US.
Investment funds well positioned to benefit, says McDermott, include Man GLG Income and Twenty Four Dynamic Bond.
FUNDS TO COUNTER GLOBAL TENSIONS
The appearance of US President Joe Biden at the G7 table marked a radical departure from the obstinate stance of his predecessor – and may usher in a new era for global economic co-operation.
Andrew Bell, at investment trust Witan, says that we should now expect to see the US reengaging with a ‘multi-lateral approach to problem solving’ after the ‘megaphone diplomacy’ of recent years.
‘The world faces problems that stretch across borders, as well as a growth in authoritarianism,’ he says. ‘Realism, engagement and politeness are ingredients in helping to craft solutions and keep the peace.’
But this doesn’t mean an end to global tension, which could destabilise the future value of financial assets – tension caused either by an aggressive China reconfirming its intent to control the South China Sea, or Russia prodding away on Europe’s eastern border and testing Ukraine’s patience.
For those considering protecting their assets from any such destabilisation in the future, Chelsea’s Darius McDermott suggests that they look at investing part of their portfolio in targeted absolute return funds. These aim to deliver positive investment returns in all kinds of markets.
The best of these funds, says McDermott, include BlackRock UK Absolute Alpha, Church House Tenax Absolute Return Strategies and Janus Henderson Absolute Return.