Many of the fund managers with whom we invest our own and our clients’ money have reported that at this time of Covid-19, they are finding it difficult to predict short or medium-term market movements. Their response has therefore been to design diversified portfolios that are prepared for a number of scenarios.
In our view, good fund managers, the ones we trust, acknowledge market uncertainty and are comfortable with it. They can hold seemingly different scenarios together and respond to changing circumstances as new facts emerge.
Some of the newsletters and comments we have received from our fund managers over the last two weeks have shared their ideas of how economies around the world will change (or have already changed) in the short term and made some comments about possible longer-term changes. While some think that the world will ‘pretty much muddle on as before’, others have predicted that Covid-19 will be a catalyst for a ‘great re-set’.
They also note that the markets will continue to be volatile as different tensions and variables become apparent. We have listed some of the short and longer-term trends which have been mentioned.
Our fund managers have noted that in many cases, share prices of companies that might do well in the short and medium-term have already gone up.
Durable, nimble firms with good balance sheets are always attractive: Fund managers report that over the last month they have scooped up quality companies with healthy balance sheets and strong trading prospects. These companies were identified as desirable investments in the pre-Covid-19 era but were passed over as they were too expensive at the time. Some had their share prices pummelled by indiscriminate exchange-traded fund selling and subsequently offered good value.
Firms that have invested in or are exposed to digitalisation and online services: Pre-Covid-19, some of the world’s leading banks, retailers and insurance companies invested heavily in online services. Their foresight has paid off. The shift from physical retail to e-commerce is likely to benefit internet providers, logistics infrastructure for deliveries and combination high street/ online retailers for years to come.
Online entertainment: The consequences of ‘cocooning’ (first described by trends guru Faith Popcorn in 1981) plus a dose of post-Covid-19 agoraphobia may be with us for years to come. Homes and private spaces may well become the preferred places of relaxation and entertainment. Share prices of companies offering these goods were in a handful that held up or even increased in price over the last few months. However, it is likely that ongoing demand for home-based gaming and other home entertainment options will mean more competitors and more disruption in this sector.
Goodbye to ‘Just in time’ supply chains: Concerns about geopolitical security have caused many firms to re-evaluate their supply chains, especially for key products such as medicines. It has become clear that low price-conscious JIT is high-risk from a delivery point of view. It is possible that a wider range of competing supply chains, with manufacturing spread across different countries will emerge.
Protecting frontline workers: The terrible and in many cases, unnecessary sacrifices made by health workers during the Covid-19 pandemic requires new solutions. It is possible that technology may come to the rescue in two different formats. The first may well be the greater use of robots in hospital settings to measure the vital signs of infected patients. The second may be the Post-Covid-19 adoption of telemedicine as a ‘new normal’. Up till now, telemedicine has been frowned on by regulators from many jurisdictions. Preventing infections in waiting rooms to fellow patients and health workers is a new priority. And clearly, telemedicine consultations could save both time and money for routine prescription renewals, routine check-ups, discussions on lab results and post-op visits, to name a few.
Healthy habits: Not only is the epidemic likely to bequeath us a generation or two of instinctive hand washers, but more of us will also do more than we did previously to stay healthy. Forget vitamin supplements; the new era could be defined by personal access to biometric data to ensure our physical and emotional well-being. Get ready for embeddables, swallowables, remote heart monitoring and real-time AI to alert medical professionals that we need assistance before we know it ourselves.
Working from home: Covid-19 has shown that many office workers can be more productive at home. In countries where urban living comes with high rents and high public transport costs, this could have a profound effect. In the US the three largest metropolitan areas, New York, Los Angeles and Chicago have suffered from decreasing populations over the last few years. It is possible that Covid-19 which hit densely populated New York so hard might be a tipping point, pushing those with work flexibility to suburbs and smaller cities. This has already impacted the prices of corporate property firms and residential property.
Goodbye to Mom and Pop/ destination stores: Specialist retail stores have proved to be the least resilient in the face of Covid-19 as their pockets were simply not deep enough. How will their disappearance affect the urban landscape? Will some shopping centres subsidise or pay the rents of those specialist shops with the capacity to draw shoppers from outside their normal retail zones? Or will we have bleak and empty malls with no choice between surviving franchises?
Global warming, single-use plastics, damage caused by carbon-based fuels and destruction of animal habitat: One of the lasting effects of covid-19 might be a collective sense of the fragility of the natural world. After all, it was probably the consumption of either a bat or a pangolin that brought us the pandemic. It is unclear how changes will be made, but seeing blue skies in (previously) smog-filled New Delhi, Johannesburg or Wuhan has a visceral impact. It is likely that people will be more thoughtful and prescient of their actions in the future. Entrepreneurs are likely to respond accordingly.
From small to big government: Many governments have announced massive emergency funding programmes for citizens’ basic needs, job preservation and small business assistance (See statistica.com chart). Bail-out loans to businesses could be conditional on complying with a range of environmental, social and governance (ESG) requirements. The necessary increase of government debt to pay for these measures could tempt the government to grab a bigger share of the economy. Democratic countries with a free press will be better placed to fight unwelcome intrusions into the private sphere as well as the right to reclaim pre-Covid-19 policing norms.
The harsh spotlight of inequality: The fallout or ripple effect of the way that that Covid-19 played out differently according to the wealth and access to services of those involved will not be ignored. However, it is far from clear how the conversation about social justice or the ‘capitalism is broken’ argument will play out in different countries. But it will, and innovators will be ready with a commercial response.
Increasing US/ China tensions: When the pandemic has passed, it is possible that one of the legacies might be a new low in the relationship between the US and China. Will companies that are dependent upon China for essential parts for their businesses move production out of China or at least second-source out of China? And which countries will be the beneficiaries of these decisions?
Pandemic architecture: Epidemiologists predict that over the next few decades there will be more epidemics. If social distancing is to become a norm, a permanent way of life, we should adapt our physical environment to cope with new workspaces, new living spaces and new retails spaces. An article published by Architizer Eight Ways COVID-19 Will Change Architecture’ is worth a quick read.