Five themes that investors will need to keep in mind in a post-coronavirus world

by Tom Bailey from Money Observer |

Weaknesses and vulnerabilities, previously not apparent, come to the fore during times of crisis, while pre-existing trends accelerate. 

In a time of crisis two things often happen. Pre-existing weaknesses and vulnerabilities, previously not apparent, come to the fore. As Warren Buffett is often quoted as saying: “It's only when the tide goes out that you learn who's been swimming naked.” Second, pre-existing trends often find themselves being accelerated.

The current coronavirus pandemic is no different. Based on vulnerabilities now exposed and trends now accelerated, Killik, in a new research note, identifies five key themes to shape the world once the virus finally passes – and crucially the industries and companies that may benefit.

The five themes are: deglobalisation, decarbonisation, healthcare, digital transformation and ecommerce.

Globalisation may begin to reverse

On the first theme, Killik notes the past few decades of globalisation has brought untold benefits to the world. Global supply chains and specialisation across borders has reduced poverty and provided economic development in emerging markets. In the developed world, this has helped boost profits and provide consumers with lower prices.

However, Killik notes: “We think globalisation may begin to reverse, having first faced the issue of the recent trade war between the US and China, and more recently the impact of the coronavirus pandemic.”

The crisis has exposed one major downside of globalisation from the perspective of governments and their citizens: having supply chains for critical goods, such as medical supplies and food, located outside domestic markets.

At the same time, companies that rely on global supply chains have been left vulnerable in a world of lockdowns and may now see these supply chains as a source of weakness.

Killik envisions a trend towards supply chains shifting closer to developed markets. Some commentators have previously noted that companies may chose to shift production to low-wage and developing economies closer to developed economy markets. For Europe, this would mean production in places such as Morocco or Turkey, while for the US it would mean more production in Mexico.

However, Killik argues that many companies will end up moving supply chains and production back to developed markets themselves, even if it means a loss of cheaper labour.

The winners of this trend, Killik says, will be factory automation equipment suppliers, industrial software providers and developed market industrial property owners. Meanwhile, global shipping companies, contract manufacturers and emerging markets could be the losers from these changes.

Killik offers up three shares likely to benefit. First, Microsoft, due to its position as a leader in enabling the Internet of Things (IOT), which will be in demand from firms re-shoring factories to high-wage economies.

Similarly, the company SAP, a global leader in enterprise resource planning and IOT, should see increased demand for its services.

Meanwhile, Killik also argues that sports brand giant Nike should benefit due to already being ahead of the curve in the trend for moving production back to developed economies.

The path towards decarbonisation

The second big theme, says Killik, will be decarbonisation. They note: “It has not gone unnoticed how some of the regions that have seen the highest incidences of Covid-19 infections, including Wuhan in China and Lombardy in Italy, have elevated levels of air pollution.”

While the connection between high pollution levels and infectious diseases has long been known, there will now be an increased focus on this link post-coronavirus.

Killik says: “We believe that a lasting impact of the coronavirus outbreak might be an increased focus on air quality, speeding up the decarbonisation of energy supply. In addition, we expect tighter regulation around emissions, both at an industrial level and at a local level, with potentially more cities banning polluting vehicles and driving a shift to electric vehicles.”

Unsurprisingly, the winners of this trend are predicted to be companies associated with the provision of renewable energy. Losers are expected to be oil and coal companies.

Killik cites renewable energy company Orsted as a possible winner. The company specialises in the development, construction and operation of offshore wind farms.

Utility company SSE should also do well, with Killik citing the company’s ability to handle the increased complexity that will come to the powergrid as renewable energy use increases.

Healthcare spending set to rise

The third theme highlighted is an increase in spending on healthcare. Part of this will be to increase capacity as countries around the world will conclude that having a healthcare system working at full capacity under normal conditions is no longer be acceptable. At the same time, there will be an increased push towards the next-generation of healthcare technology, with increased use of online doctors and artificial intelligence.

The winners of this will be diagnostics companies, hospital equipment suppliers, next generation digital healthcare providers and health insurers, says Killik. Specifically, this may include Danaher, the world’s leading supplier of diagnostics machines and Philips, a provider of patient monitoring systems.

Digital transformation

Coronavirus will also accelerate broader digital transformation of the economy, with Killik noting: “We believe that the coronavirus crisis will accelerate digital transformation to solve two separate problems: how to serve your customers when you can’t meet them face-to-face, and how to enable your employees to work remotely.”

The winners will be enterprise software providers, technology services businesses, cloud computing providers and the telecom networks. Two potentials winners are Accenture and Tencent. Losers will be office property owners, the travel industry, transportation networks and casual dining sector.

Acceleration of ecommerce

The final theme is an acceleration of the existing trend towards ecommerce. Killik notes that while ecommerce has seen strong growth in recent years it is still an overall small portion of retail sales. For instance, in the US ecommerce accounts for just 11% of total retail sales. In the UK that figure is 19% and China 20%.

The lockdown, however, should see that adoption rate grow quicker than it might have. For example, UK online grocers reached capacity during the first stages of the lockdown, forcing some to stop signing up new customers. Meanwhile, in the US, Amazon has added over 100,000 new jobs to deal with increased demand.

The hope is that new customers stick around once the crisis has passed, particularly in areas such as food where consumers have previously been more resistant.

The clearest winners in this trend will be ecommerce companies, with Amazon still the undisputed leader in this space.

Killik also believes Tesco will be a winner, noting that it is the leader in grocery ecommerce in the UK, accounting for around 35% of market share.

All that online shopping, however, must also be paid for. As a result, Killik sees PayPal as a potential winner.

Losers will be physical retailers that fail to make the transition and commercial property owners that had previously rented their spaces to retailers.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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