The coronavirus pandemic has already transformed our world, so we must reshape our investment strategies accordingly, says David Prosser.
Lenin could have been describing the Covid-19 pandemic. “There are decades where nothing happens and there are weeks where decades happen,” the Russian revolutionary once pronounced – and that feels spot on right now. The world has changed in the space a few weeks, and while we will eventually emerge from lockdown, there will be no going back.
That is not necessarily a bad thing. Some of the changes forced on us by Covid-19 – from a new appreciation for cleaner air and reduced traffic to increased admiration for health and other frontline service workers – will have been welcomed by all. In other areas, however, the impact of the virus have been hugely negative: it has curtailed our freedom to travel, for example, and exposed our vulnerabilities.
As the cliché puts it, we will emerge from the pandemic into a ‘new normal’ – but the question is where, in a world that looks and feels familiar, change will prove lasting. “The answer to this question will play a big part in determining investment strategies for the next decade,” warns Darius McDemott, managing director at Chelsea Financial Services.
Here are six ways the crisis could reshape the investment landscape.
1) Globalisation comes to a halt
One irony of the Covid-19 pandemic is that a disaster facing almost every country in the world at the same time looks likely to put a stop to the seemingly inevitable process of globalisation we have seen in recent times.
Even in confronting a crisis of this magnitude, countries have been unable to come together, with the United Nations criticising its members for their failure to co-ordinate their responses, and the US keen to blame China for the virus’s emergence and subsequent spread. Strands of protectionism and economic nationalism evident prior to the pandemic – such as the US-China trade dispute and Brexit – are rapidly becoming binding.
The lessons of history are clear, argues Carmen Reinhart, the renowned US economist. “World War I and the global economic depression in the early 1930s ushered in the demise of a previous era of globalisation,” she says. “The coronavirus pandemic is the first crisis since the 1930s to engulf both advanced and developing economies. Their recessions may be deep and long. As in the 1930s, sovereign defaults are likely to spike. Calls to restrict trade and capital flows find fertile soil in bad times.”
Not every retreat should be mourned. Some elements of globalisation have been brutally exposed by the Covid-19 epidemic. In particular, convoluted and inter-dependent supply chains, often built by cost-conscious businesses in the West, have broken down. A move to more localised production and supply would boost resilience and provide protection against future crises.
However, for those who believe free trade, international commerce and open economies offer the most conducive conditions for global prosperity, a more isolationist world will be deeply worrying.
Bear in mind too that there will be winners and losers as countries turn on one another – and the former group may not include the nations you expect.
Bruce Stout, manager of the Murray International Trust, says: “More than a decade of reckless financial engineering leaves numerous companies exposed to the so-called developed world with over-extended balance sheets, deteriorating creditworthiness, and an opaque outlook for earnings and dividends. Yet in Asia and emerging markets, the post-pandemic landscape will likely remain abundant in investment opportunities.”
In this world, Stout argues, under-leveraged companies exposed to “significant pent-up demand driven by favourable demographics, robust savings, rising real incomes, and greater intra-regional trade and self-sufficiency” will outperform. However, that doesn’t sound like the typical contents of many investors’ US- and UK-oriented portfolios.
2) Healthcare goes digital at last
The health sector has been on the frontline of the battle against Covid-19, but even before the crisis, it was facing huge structural pressures, such as those arising from global demographic change, and from adapting to remarkable advances in new technologies and treatments such as immunotherapy.
Prior to the pandemic, we wondered about our healthcare systems’ ability to cope with rapidly ageing populations, particularly those in western countries, as well as the growing middle-class populations in many developing economies. Covid-19 has shown that in many ways our healthcare systems are indeed not fit for purpose: healthcare workers have coped remarkably well under the circumstances, but have struggled with a lack of capacity, inadequate testing and shortages of personal protective equipment.
Mark Sherlock, manager of the Hermes US SMID Equity fund, believes policymakers will now feel compelled to remedy these shortcomings. “We expect the government response in many parts of the developed world to be to invest more in their healthcare infrastructure to ensure they are better prepared if the virus returns,” he says.
Increased investment in health will be accompanied by an accelerated take-up of new solutions. For example, while big things have been predicted for telemedicine for years, patients and doctors alike have been slow to embrace virtual consultations and remote diagnoses. Covid-19 has changed that overnight. Similarly, in the field of data analytics, the world has woken up to the importance of collecting and analysing information and insight, both at a big-picture level and individually; ‘track and trace’ apps, for instance, have been introduced worldwide, despite fears about privacy.
This will continue, argues David Coombs, manager of the Rathbone Strategic Growth Portfolio fund. He says: “The future will be about smart medical devices that can collect data on our health through smartphones, and about virtual visits to the doctor. I’ve always believed you should invest in a tailwind and we have one now in healthcare: every government in the world needs to provide more healthcare for less money.”
3) E-commerce and home working come of age
Not every business has suffered during the pandemic. Amazon’s sales hit $75 billion (£60 billion) during the first quarter of the year (more than $10,000 a second), some 26% up on 2019. Shares in video conferencing specialist Zoom more than doubled in value during the first four months of 2020 amid the global work-from-home phenomenon.
There is every reason to think these success stories will be sustained, even after the pandemic has passed: one lasting effect of Covid-19 will almost certainly be the triumph of e-commerce.
In the retail sector, the trend away from conventional retailing has been accelerating for years, but the experience of consumers during lockdown means there will be no going back. Every retailer, whether in food or non-food, now needs a multi-channel strategy. Chris Ford, manager of the Smith & Williamson Artificial Intelligence fund, picks out Ocado as a clear winner here, benefiting from its strong position in online groceries and as an online shopping technology provider.
Beyond all that, Covid-19 has proved that broadband connectivity and home-based digital technology provide us with an opportunity to do more than just shop online. Millions of people – and their employers – have discovered that perceived obstacles to working from home, such as loss of control or lack of personal interaction, aren’t really a problem at all. The gains, meanwhile, have been considerable: a reduced environmental footprint from commuters and business travellers, and an increase in productivity as workers manage their time more effectively, for example.
There will be no going back, according to Bob Kaynor, manager of the Schroder US Mid Cap fund. “The past two months have highlighted the reality of what we are capable of doing away from the office,” he says. “Corporate office and plant manufacturing environments will change.”
Businesses able to facilitate this change will benefit enormously. That means big names in technology – led by Microsoft, given its leadership in office productivity tools and communications apps such as Teams and Skype – but also firms playing supporting roles. TeamViewer, which offers online remote support to home workers, is a good example.
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4) Restart for travel, tourism and leisure
As in retailing, in sectors such as travel and leisure the pandemic will accelerate pre-existing trends, such as the backlash against flying, with environmental pressures weighing on both business travel and flight-based tourism.
“The high point for international travel is almost certainly over,” says Jason Hollands, managing director at Tilney Investment Management. “While cheap oil is a tailwind, a prolonged period of physical distancing is likely to send flight costs rocketing, and business travel will see a permanent contraction as firms embed video-conferencing services.”
Similarly, in the leisure sector, companies able to provide services that cater to consumers stuck in lockdown but, crucially, also keen to stay at home in the longer term are already outperforming. That’s good news for the likes of Netflix and US bike exercise company Peloton. Gyms and cinemas, on the other hand, are less well-placed to thrive. The bitter row between cinema chains and Universal Pictures, which is releasing new movies straight to home audiences, is a sign of what lies ahead.
There will be other winners. Online gaming looks set to become an even bigger market than it is currently, while lockdown has proved that education can be delivered in a virtual form.
5) Real estate faces existential question
With the residential property market in the UK frozen and businesses requesting rent holidays in the commercial sector, the real estate industry is in a desperate state over the short term.
Moreover, its medium- to long-term prospects also look pretty bleak. “Communication, entertainment, commerce, healthcare and education have suddenly switched to remote, digital delivery at a rate an order of magnitude over what we could have imagined,” says David Eiswert, manager of the W Rowe Price Global Focused Growth Equity fund. “Digital is no longer supplemental – it is primary.”
In commercial property, one consequence of the home working phenomenon will be that firms need far less office space. That spells bad news for both large office landlords and flexible workspace providers, while new office development will be curtailed.
Equally, on the high street, the accelerated shift to online shopping will pose increasing problems for landlords; and the move away from bricks and mortar retailing will not be alleviated by growth in hospitality and leisure, since it will take years for businesses such as pubs and restaurants to recover from the crisis.
Even in the industrial sub-sector of commercial real estate, Covid-19 looks set to be a game-changer, boosting the case for local supply chains, more fluid logistics and advanced manufacturing, for example.
Residential market activity will inevitably resume as viewings become possible once again and property transactions are unlocked. But in an era of depressed consumer confidence, increased risk aversion and squeezed disposable incomes, the pick-up will be slow. In the medium to longer term, moreover, Covid-19 may encourage us to rethink how we live: we may see more intra-generational households, for example, and less reliance on the care home sector.
6) Climate change efforts in the balance
Finally, one big question concerns what Covid-19 means for climate change. On the one hand, even if today’s clear skies, roads and waterways will inevitably become less so as lockdown eases, we have been given a taste of a less polluted and congested world.
Demand for cleaner forms of transport and energy will increase. On the other, the plunging price of oil will undermine the investment case for renewables; and as governments worldwide eye widening fiscal deficits, their commitment to reducing carbon emission may waiver.
The arguments over climate change are likely to continue and be just as bitter as in the past. Still, the optimists believe the positive effects of the pandemic, particularly in relation to work and travel, will prove more enduring and significant than a temporary collapse in the oil market.
Pandemic calls for big-picture thinking
How can investors capitalise on the opportunities that will arise in the post-Covid-19 world – and avoid the pitfalls? Some independent financial advisers are advising investors to go back to basics to survive the crisis and to consider what might work over the longer term in the brave new world we face.
In relation to the former, Philippa Gee, managing director at Philippa Gee Wealth Management, says: “My approach is to expect more significant volatility. I advise moving some of your asset allocation from income assets into growth, ensuring you have the geographical spread you need and checking that your risk tolerance is right for you.”
Looking ahead, Adrian Lowcock, head of personal investing at Willis Owen, makes the case for thematic investing with funds and managers that invest according to their views at the ‘big picture’, macro level rather than focusing on sector or stock selection. He says: “Both Newton and Schroders do a lot of work on thematics. At Newton the themes feed down into the structure of the fund, so each investment ticks at least one of the theme boxes.
This article was originally published in our sister magazine Money Observer, which ceased publication in August 2020.
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