The economy is being driven by huge consumer behavioural changes

Ninety One’s John Green takes us through some impacts of the Covid-19 era, and how to invest going forward.

NOMPU SIZIBA: It’s been a crazy year for most people, with lives literally turned upside down. And of course, that’s also been the case in global financial markets and the economy. Actors within the economy are having to find new ways of doing life and doing business. Investing is also not likely to be business as usual, given the changes in the economic landscape.

Well, to take us through some of the impacts of the Covid-19 era, and how to proceed with investing going forward, I’m joined on the line by John Green, the chief commercial officer at Ninety One. Thanks very much for joining us, John. What a year it’s been. Let me read out a quote to you by Yuval Noah Harari: “Many short-term emergency measures will become a fixture of life. That is the nature of emergencies. They fast-forward historical processes.” When you reflect on this statement, what would you say this has meant economically this year? Perhaps you can even provide us with some examples.

JOHN GREEN: Nompu, yes. I think that a lot of the commentary around Covid has focused on overall economies – GDP changes, slowdowns and so on.

But there’s actually a massive story that is separate from that, which I think this quote really talks to. That [is that] the fundamental way in which our economy operates is changing at an incredible pace, and it’s driven by the change of behaviour – how people buy, how they consume, how they operate day to day. Simple things, like e-commerce usage.

There’s a fantastic number that I saw a day or two ago that was a reflection on US e-commerce percentage penetration in US retail sales – that [it] took 10 years to move from 5% to 16%, and then in literally two months, it moved from 16% to nearly 7%. So effectively 10 years in three months. And that’s what “accelerating historical processes” means. And that’s going to result in huge changes in how companies operate, huge changes in how they deliver value, and huge changes in how they deliver investment returns over time.

NOMPU SIZIBA: So we can all agree that Covid-19 has fundamentally changed the business landscape. It’s forced many companies to rethink their strategies and reinvent themselves. I mean, if you look at a company like Uber, their business model was pretty much decimated in a flash. Your thoughts on that?

JOHN GREEN: Yes, it’s interesting. I mean, Uber was the ‘arch disruptor’. And now they’ve had their business model turned on its head. I mean, interestingly their ride volumes are down north of 75%, but then their Eats volumes are up north of 100%. So maybe they still have a meaningful opportunity, but their business model is changing.

Interestingly, another aspect of business that is going for them is freight. So who knows, Uber might become the next parcel-delivery disrupter, the next DHL outlet. These are the kinds of things that I think Covid is going to present companies with. There’s the opportunity to morph, to change, to adapt and to grow their businesses in different ways.

NOMPU SIZIBA: Yes. And of course, there are some companies out there that don’t look like they’ll ever be able to recover as the virus completely wiped them out. If we look at some of the big household names that have been in existence for even more than a hundred years, the likes of Hertz, JCPenney and so on.

JOHN GREEN: I suppose that when historical processes accelerate, those businesses that have been on a slow downward drive for a long period really take a very fast hit – and I mean it was really interesting to see in May this year that we’ve had in the US a number of 200-year-old-plus companies filing for bankruptcy.

Brooks Brothers, [which is] reputed to have dressed 40 presidents [and is] known as the ‘Tailor of Wall Street’, filed for bankruptcy in June. As you said, JCPenney, Hertz, Neiman Marcus and a number of others. So, all of these companies are really facing off to that change, these ones unfortunately not being able to adapt.

And now we’re seeing how they face off against opportunity. Property developers, interestingly, are now buying in the Neiman Marcus business because they see the opportunity to do something with the premises that they have in shopping malls. I think in many ways they’re an investors’ dream in terms of the way in which the market is changing. But if you’re caught off guard, it’s going to leave you standing.

NOMPU SIZIBA: Yes, you need to be instinctive and jump on the wagon quickly, I suppose, in order to benefit. What are your thoughts about the meteoric rise in others, the likes of Tesla and even the Fang stocks [Facebook, Amazon, Netflix, Google]. I mean, these do seem to represent the future.

JOHN GREEN: Oh, I think that there’s a lot to be said of these businesses that have already predicted the kind of changes that are now being deeply entrenched through the Covid environment. Video streaming is a great example, and you see the video streaming consumption going up one or nearly two times that of TV consumption. So even while we were all sitting on our couches, video streaming is the one that won out. And that was a trend that we’ve seen.

I mean the Tesla situation, what many people won’t know about that – I think everybody will know if the share price has reached stratospheric levels, Tesla is now worth more than all sorts of other companies put together – but what many people won’t know is that in Europe in June, year-on-year demand for electronic vehicles was up 75%, and the overall demand for auto was down 20%. So that’s why, in share prices, it’s not just talking to some kind of market situation – that’s just talking to some kind of short squeeze that’s important to [the] fundamental challenge out there. It’s telling us that people have recognised that they have a responsibility in terms of how we operate in the future. And if you don’t deal with that, we’re going to have situations like the pandemic.

NOMPU SIZIBA: On that point, the Covid-19 pandemic has got people thinking more seriously about climate change because obviously, the ramifications of that, in the long run, will make the virus look like a picnic. Do you think that business and other stakeholders get this?

JOHN GREEN: I think the Tesla demand for electronic vehicles is telling you that there is this deep and meaningful shift. And in fact, it starts with a poll in April of this year, asking a simple question that said: “In the long term, is climate change as serious as Covid-19?”. They did this poll across all sorts of countries in the developed and developing world, and it was incredible to see that, on average, more than 75% of people surveyed, said they believed that climate change was as serious as Covid-19.

So, if you’re a company and you’re not thinking about what that means for you, you are missing a very meaningful change in the way people think. I think that what it also tells us is that the process of improvisation, the value generated in companies that are focused on solving the problems that we face in terms of climate change, are having enormous growth in development, and that’s going to be a long-term trend.

NOMPU SIZIBA: So, John, all of this is happening in an environment of unprecedented monetary and fiscal stimulus. What has this meant for US bond yields?

JOHN GREEN: Well, I think we’ve seen US 10-year yields plumb depths that they’ve never, ever, plumbed before – a few wars, a few depressions, inflation, deflation, sticking with gold standard regimes, market crashes – never before has the US 10-year yield reached the levels that it has in the most recent period. Obviously, that tells you that the policymakers involved needed to take drastic action, which they have.

But it also tells you that low yields, financial depression if you like, is here for a lot longer than we all thought. You know – vented post the financial crisis, perfected in the years since. And it’s now going to be, I think, a feature of our financial landscape for many, many years to come. And for investors that has really serious consequences, I think.

NOMPU SIZIBA: US markets have been running really hard – that is, the equity markets. So, given this and all that we’ve discussed prior, what does this all mean for investment offshore? You do say that taking a risk to achieve returns is going to be crucial. Why?

JOHN GREEN: Look, if bonds and fixed income is not going to give you a return on a forward-looking basis, what is? Our multi-asset team looks at their capital market assumptions, and they revise their developed market fixed-income assumptions downwards fairly since Covid. But they revise their equity-return assumptions upwards, because clearly future cash flows are discounted at lower levels going forward, so that leads to equity values. But equities are really going to need to look for return.

So, if you’re a long-term investor, if you’re wanting to generate returns, you’re going to have to put money to work in areas of risk. And that’s equities, that’s risk fixed income. But you can’t sell your cash and expect to make the kind of returns that you need to generate real growth and more and more capital.

NOMPU SIZIBA: Indeed. So, what is the blueprint for investing offshore – the key considerations for investors in terms of how they choose their investments and their investment partners?

JOHN GREEN: I think a couple of things. As an advisor, as an individual, your first choice is who is the investment manager that you trust to help you do this work for you? We think that when you look at putting money to work in less lucrative areas and offshore you need to think about a few things.

I think the first is the importance of supporting active investment strategies. In an environment where you’ve got all of this change going on, just betting on the index is something that is potentially going to give you far fewer outcomes in the long run than through the active managers. And there is a huge argument over the years about active versus passive. I don’t want to go into all of those, but in this kind of environment of change, we think that active really comes into its own and can generate good value for investors.

I think the second thing to think about is really [an] investment business that has a fairly good view of what, going out, this kind of level of fundamental change that’s going on [will mean]. You want a business that’s diversified;  it’s not just a single-strategy boutique. You want a business that is understanding what’s going on in various areas of the market, in different industries, in different sectors, in different countries. And so, a business that’s reasonably diversified in the way that it has developed and the way that it runs money, I think is really going to make a difference. And similarly, you want a business that can support you, that has enough scale. I mean, if there’s this much change going on, you need to have the resources to analyse it, you need the resources to understand it, and you need the resources to make the kind of changes to your portfolios that recognise the value. So those are the things that I think are really important.

The other point to really stress as themes like sustainability and the environment get more and more traction, it’s really important to understand that, if you trust the managers to take advantage of that kind of thing, that they’re really doing that properly – that they are not so-called ‘greenwashing’; that they are investing positively for the kind of change that you’re expecting.

And for me, those are the things that we really hope those guys take advantage of [in] the investment environment. We’re certainly not saying that there’s not an opportunity to generate returns on a forward-looking basis, but you really have to be smart about it.

NOMPU SIZIBA: That was John Green. He’s the chief commercial officer at Ninety One.

Brought to you by Ninety One.

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SA”s economy is driven by Govt sector patronage employment patterns and kleptocratic patterns within the ANC and Govt systems.

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