Blain’s Morning Porridge – 28 August 2020: What future the City?
“London calling to the Zombies of death, quit holding out and draw another breath”
Its Friday, so I get to go off on a tangent again! The consequences of a steepening yield curve will just have to wait till Tuesday (holiday here in Blighty on Monday.)
Let’s talk about the Working from Home revolution – and what it might mean for markets and finance.
The City of London is the Capital of Global Finance. Together with satellites in the West End and Canary Wharf, Finance and The City employs some 500,000 of the highest paid workers in the UK, paying over £100 bln in taxes (business and personal) each year. There is more shiny bright new office space visible from our office windows in the Walkie Talkie, (which I bet still haven’t been cleaned since I last looked out of them in March), than you can shake a sharp pointy stick at.
The pandemic may be easing, but the City is still a Ghost Town. Tumbleweed blows down the streets. Lowest common denominator junk food vendor Greggs is about the only place open. (Seriously, their steak slices are to die for.) I’ve not been up myself, but She-who-is-Mrs-Blain was pretty shocked.
The news JP Morgan and the magic circle Law Firm Linklaters are ending the daily commute and telling staff to telework from work and in the office actually confirms the massive changes underway in how we work in global finance will be fairly limited. Staff will still be expected to come into the office regularly. Other firms, including Schroders, report WFH has been a stunning success – with their business flourishing – they say. However, I’m told “freedom” for staff to WFH will be at their managers discretion.
On the other hand, a chum who runs an office-logistics firm tells me they are busy as London trading floors are being converted into flexible workspace while rows of desks are being consumed by new meeting rooms.
Although we hit peak WFH months ago, less than 35% of British office workers have returned to work. That compares to 83% of French employees de bureau. Personally, I suspect the main reason keeping staff from returning to their London offices is the misery of commuting. If WFJ works… then why take COVID risks on London’s dirty, filthy, unreliable and massively overcrowded rail and tube networks? When I go back to London I will relying on my Brompton bike for in-town travel.
However, I suspect the Pandemic will act as a catalyst to accelerate changes in Finance – which are going to have some long-term fairly unsettling effects on a large portion of the workforce. I expect the “accelerant” effect of COVID in changing/shaking industry and commerce will prove its most lasting bequest to us all.
Therefore, I award myself a “No Sh*t Sherlock”prize for realising the City is going to be massively changed by the Pandemic. We’ve seen predictions about the end of the modern office but its only now we’re beginning to see facts emerge. For instance, JP Morgan will be closing their Basinggrad office (Basingstoke to those of you who don’t commute) because they now know WFH makes recovery sites redundant.
Like most things in finance, the hyperbole and dystopian outlook of a permanently empty City is overblown. There will be changes, but it won’t be the end of everything. Over the last few days I’ve been asking clients and market contacts what they think the future holds for the Financial Industry, Teleworking, the Office and how Investments and the Market will be impacted by the coming evolution of the financial sector.
Let’s start with working from home.
Teleworking has pros and cons. It tends to be generational. Younger workers stuck in small London flats quickly went crazy and couldn’t wait to get back to work. Older workers have convinced themselves they’re working hard while finding time to go for long walks and do the garden.
When lockdown began there were serious regulatory concerns about how financial business could be conducted from home rather than controlled city locations. The head of one of the UK’s most important and influential institutions told me he’d been very concerned about trades being done in “another person’s shed” rather than the office, but that “after my hand was forced, I have to admit it’s worked rather well.” The same chap notes nothing will replace the “City Lunch” or the chance meeting as the sparks where business and ideas germinate.
I’ve written a few times about missing my “broker ear”, the ability to listen in to office conversations to sense what was occurring in the market, but to be honest, that was more 1980s-2010s. Since then offices have become far less energetic, and the language which conveyed the emotion of markets has been sensitised. I can learn what I need on calls.
On the other hand, humans are evolved social creatures. We thrive in company. We aren’t so good in solitary – which is why it’s a punishment. We need social impetus – the stimulus of discussions and arguments sparking ideas on the desk, driving the creativity and problem-solving that’s made the UK financial services sector such a success. No one is taught how to be a City financier – you learn through a process of osmosis in the office – “it can’t be learnt in half-hour Zoom calls”, said a client.
We also need threat – the knowledge that underperformance could cost us our jobs, and that younger staff want our salaries and to sit in our seats. If there is no sense of threat, people work less hard – fact. (That’s why bureaucracies ultimately kill economies.) I would argue competition with colleagues is the biggest driver of success in finance. Another client pointed out: “firms that pair back on analyst and associate programmes see a noticeable decline in output.” Fear of obsolescence and burn-out is a vital component of success.
Competition is also evident at firm level where the speed at which staff are returning to the office is a function of moral and the character of individual firms. It’s a form of resilience. I hear that over 50% of Goldman Sachs were back in the office the moment the doors opened – The Vampyre Squid is feeding them and offering free child-care. Smart. I reckon if we could chart returnees for each bank it would correlate directly with how successful the bank is perceived to be. (Please don’t tell me Deutsche Bank is already back in situ?)
At the other end of the scale, trying to get hold of a retail bank staff at high-street banks is still impossible – they were demotivated and bored before the crisis, and it’s just got even less interesting for them. If they can say they are anxious and stay at home, why wouldn’t they? I am so peeved with my bank making excuses blaming the virus as explaining why no one could help me chase missing money.
Then there is the importance of being present in an office. When it comes to awarding important new business, or investing in a fund, the principals are under a duty of care, which using includes “onsite due diligence” – meaning having a swanky office at a top City or Mayfair address that looks busy is still important.
WFH vs Office is bound to raise work-life balance questions. A senior European fund manager in London told me his younger European staff are seriously considering moving home – not because of Brexit, but because the whole point of being in London is because its so much more exciting than Frankfurt, Milan, Madrid or Paris. If it’s not, and London’s cultural menu is effectively zero at present, then working in Munchen – where a 10 min cycle gets you to a beer garden in the countryside – feels much more attractive.
On balance, WFH works, but isn’t ideal. I suspect we will all move towards an office/home mix. That will be determined through experimentation and common sense. My own intention is certainly to get back in the office regularly, and to resume face-to-face client meetings as soon as possible. (Meanwhile, you can see watch my videos on https://staging.morningporridge.com/videoif you are missing my face!)
Technical issues reopening buildings
There are good reasons why more City staff haven’t yet returned. Technical problems about distancing have to be resolved before offices can reopen. Many clients tell me they have been unable to return to their offices because building owners haven’t figured out how to ramp up the air conditioning to cope with the number of people and new recommendations on ventilation, or how to get people to their working floors when lifts can only carry 3 passengers at a time. Its physically impossible to get 600 people onto a trading floor at 7.30 am when only 4 lifts service the floor.
The reality is London’s office towers were designed for a normal business environment. If the pandemic really means we have to keep social distancing and restrict numbers – then they just don’t work anymore. We will need a vaccine, or the bravery to agree the virus risks are manageable, the disease treatable, before we reopen them fully. Tower Block Offices don’t lend themselves to compromises. The future of the tower block office depends on what the post-Covid analysis says about the efficacy of lockdowns and distancing.
It’s clear there will be an impact on office demand. A senior banker told me he expects to cut the number of desks by 1/3rdand institute a hot-desk policy for rotating staff each day. If that’s replicated across the City, then demand for office space drops at least 1/3rd.
Perhaps the biggest loser is WeWork – they would have taken a thumping from cancelled desks at the start of Lockdown, but could have been marvellously positioned to reap rewards as small and mid-sized firms actually give up on offices completely. Perhaps it’s a business idea to think about: “WeWork2: this time we’re serious…”
The knock-on effects…
The services the City demands are massive. It’s not just shops and catering, but also supports such as travel. Bankers are not travelling to meet clients. Boards are doing meetings by Zoom. Conferences and Events have been cancelled. At least one senior city figure is delighted – “It all saves on the bottom line, and these fripperies never added to the bottom line. We did corporate hostility because everyone else did it.”
While losing the expertise of “event-managers” is unlikely to kill the City, the potential loss of skilled deal facilitators who become sidelined, like lawyers, accountants, media-advisors and digital IT geeks could prove highly significant. If they stay away in droves, choose to go elsewhere, or simply aren’t trained.. then London’s financial sector will be in serious crisis.
And then there are the cost implications. Large firms have the reserves to maintain their half-full trophy offices, but smaller firms being battered by the effects of the pandemic are going to struggle – leading to an inevitable glut of property as they fold or exit. The pandemic is culling smaller firms – which is a serious loss of future genetic diversity for the City.
The actual financial impact of WFH is going to be felt hardest in the Insurance Real Money sector – these firms have become the largest owners and funders of commercial property, although I’m hearing Chinese banks are going to take a serious bath as well. Landlords are doing rent deals because it’s better to have a tenanted office than an empty one! As they say: “The best tenant is the current tenant!” Expectations of high returns on prestige City Tower Blocks have tumbled. The effect is going to be most visible on UK pension and insurance companies performance – which means on the retirement savings of the workforce..
.. will change the Financial Industry
As I wrote earlier the Pandemic and teleworking are just accelerating trends that were already underway in finance.
The strengths of financial experience and creativity that led the boom in financial services has been under the regulatory cosh for the last 15 years. Don’t kid yourselves, but being a fund manager today isn’t the era of financial buccaneer spirit I encountered in the 1980s. Today, most City jobs are largely about box-ticking, regulatory oversight, and compliance – and the objective is to not be beaten by dumb indices. QE Infinity and ZIRP have dulled the game.
The fact most firms have apparently done well during lockdown could well expose a brutal truth: “their basic worthlessness has been exposed by forced absenteeism without any consequence to the bottom line”, a fund manager told me.
It’s likely to get worse. We’ve known for years that automation and AI is going to eat into middle class professions. Bond salesmen are pretty much already dinosaurs in a market where the big funds have to buy everything anyway, and AI determines portfolio compositions to beat the indexes. Jobs are going to go – meaning the ecosystem of the City is going to contract. Even writers of financial commentary…. I can’t be replicated (!) but if no one is left to read me, I am equally redundant! (Perhaps I shall start to write the porridge in binary to make it easy for investment-bots?)
Using the cover of cost savings due to the pandemic, I expect to see at least 10% of City Staff culled by the end of the year. The numbers being let go will keep rising next year. Thats a serious disincentive to new joiners, and the energy levels of the City will drop accordingly.
And then there is the effect of the Pandemic stifling innovation. Let’s assume you just had a brilliant idea that’s going to make Finance exciting, renumerative and deliver excellent above market returns, but you current employer can’t do it because “it’s not in mandate”, “compliance say no”, or “we are concerned about ESG/Mifid/SEC (delete where applicable)”. Your chances of funding and launching that brilliant idea aren’t looking good. Instead the older City dinosaurs that were being kept alive by regulatory constipation, will retain their dominance because the efforts to contain the pandemic enables them to survive when Darwin says they perish!
And we need brilliant ideas, because the challenge to the City today is simple. We exist In a global financial marketplace where returns have been minimised and risks maximised by interest rate repression and QE Infinity – how do you generate meaningful returns to finance retirement and growth?
I’ll be fascinated to hear further views from readers on how the virus changes our future.
Five Things to Read This Morning
Property Chronicle – The Long-term resilience of real estate
Thunderer – Don’t bet the house on working from home
Have a great weekend..