Destructive capitalism

The pandemic has radically changed how we work. That makes propping up struggling companies a dangerous pastime for the government, argues our head of multi-asset investments David Coombs.

Ronnie Scott's jazz saxophone player

Last Thursday, Tracey and I paid our £10 ‘entry’ donation and settled down to watch a tribute to saxophonist Charlie “Bird” Parker on YouTube. This was a live stream from Ronnie Scott’s Jazz Club, with Gilad Atzmon. It was excellent, although it’s hard to create atmosphere in a room with no audience. Having been to the club often, it really made us pine for London for the first time since lockdown.

That same day Boris came under pressure to encourage office workers back to work to support the London economy. To be honest, Ronnie Scott has more influence than the machine of government.

COVID has been one of the many economic shocks in my career, which started back in the mid-80s. Of course, there have been many over that period: the ’87 crash, the Asian debt crisis, various Argentinian defaults, the UK’s exit from the European Exchange Rate Mechanism, dotcom, Enron, the GFC, the list goes on. Yet, I would argue this shock will probably end up having the greatest long-term impact on both macroeconomics and the micro (individual companies).

Many businesses in our big cities, in the travel hubs supported by office workers commuting from miles around, are struggling. Pret a Manger has somehow become the media’s barometer on the urban plight.

I feel terrible for all the thousands of people working in these businesses who are dealing with chronic uncertainty over their jobs. The management of these companies have a tough time as well. They cannot wait for the government or their customers to bail them out, they need to plan for a future that is likely to be quite different from the pre-COVID era, even if we are all still in the dark about what it will actually look like.

However, we have to be careful about trying to bail out everyone and everything. No business has a divine right to exist. Some tabloid columnists are urging office workers to return immediately to the cities to support these businesses. It’s hard to argue with the sentiment, we all want to help those in need, yet we have to take a step back.

Businesses have to stay relevant to survive, let alone to grow. Since 2008, drunk on quantitative easing we have started to believe that all businesses should be propped up forever. I don’t remember people calling for everyone to keep renting DVDs to support Blockbuster, or encouraging the purchase of 35mm film to save Kodak. We’re certainly not encouraging people to buy more petrol to save employees at BP. So, Pret? They make great avocado sandwiches, absolutely; and yes, their staff are always amazingly friendly. But I’m not sure that propping up sandwich makers is a good long-term strategy. (I must mention a conflict here, regular readers will know how much I despise avocado, the devil’s fruit.)

So there appears to be a double standard. Should WH Smith be saved now that train stations are empty? (Its travel retail units saved the business as high street shops declined.) Of course not. We must avoid the mistakes of the ’70s – subsidising industries and businesses that are unable to adapt to modern customer demand. Otherwise we would still have the National Coal Board. But the government must ensure that it is ready and able to support the people who lose their jobs when these businesses fail. They need help to retrain and get back to work in something that has a future. That’s how we improve our country’s productivity and get ahead as people and as a nation.

All this change will create opportunities for new businesses offering products and services that are actually relevant to consumers after the pandemic. It is these businesses that we should be investing in and that the Government should be supporting. It is ok going all Keynesian if you spend the cash wisely. Throwing it away on failing business models will not push up GDP. It will push up taxes and ensure the recession lasts longer, much, much longer. 

And trying to pressure office workers, and their employers, into doing the right thing for a business rather than their own families – particularly if the business is owned by private equity – is a policy doomed from the very start. 

London will survive because, as the tribute to Charlie Parker reminded me, it remains the cultural capital of the country. I still want to spend a lot of time in London and I will continue to do my bit to support the London economy, but I suspect that I will also be supporting my neighbourhood in Wiltshire more than I have in the past, which is arguably a good balance. So I’m sorry, Upper Crust, it’s not personal…

Blog image by David Coombs. 

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Subscribe to the In the KNOW blog email