6 minute read
Investment lessons from 2020
MARK LOVETT, STANLIB Head of Investments
2020 will forever be associated with the COVID-19 pandemic. It necessitated some fundamental changes in behaviour, some of which will be only temporary. However, there are certain areas where structural and more permanent change will occur. I will explore these under five broad themes.
1. Geo-political issues
• Reversal of globalisation trends
This is undoubtedly the most significant risk that we face as a result of COVID-19. Our central view should be that we can no longer rely on globalisation as a tail wind for economic growth and financial markets. During this crisis, some of the dependencies associated with globalisation became painfully evident, including no/limited access to domestic manufacturing capacity in key segments of the economy, as well as long supply chains and high regional dependencies. National vs globalisation debates will take place against the backdrop of a substantial increase in domestic unemployment, adding to the pressures on halting or reversing some of the trends.
• Anti-China sentiment
Another substantial risk for global economic growth is a sustained period of anti-China sentiment, particularly if the COVID-19 post-mortem identifies that China lacked transparency on the initial virus outbreak. This risk is primarily at the geo-political level but may also spread to the consumer if the postmortem reveals that China fell short of its moral obligations.
• Addressing neglected country risks
The COVID-19 pandemic has embarrassed several countries in their lack of preparedness for a potential crisis. Post the crisis, there will be a reassessment of the domestic capability to deal with a wider collection of future risks and not to be too reliant on internationallyfunded organisations.
• Tax systems will need to change
All countries will face significant fiscal pressures. For example, in SA the long-term fiscal consequences of COVID-19 will be enormous, raising questions about government’s achievable priorities. Apart from reducing expenditure, governments will have little choice but to look at both corporate and income tax regimes to address the fiscal deficits.
• Radical financial remedies become mainstream
The unprecedented monetary and fiscal response to the crisis will raise questions about whether such policies should become more permanent in nature and enter mainstream political debate. Issues could include Modern Monetary Theory, Debt Forgiveness and Universal Basic Income (UBI).
2. Disruptive technologies become mainstream
• Growth in internet-based transactions
The lockdown associated with the COVID-19 pandemic has provided an enforced re-appraisal by individuals and corporations of the type of transactions that can be undertaken online. COVID-19 has accelerated that acceptance curve. Individuals and corporations have literally been forced to move to internet-based transactions.
• Payment Technologies (including security)
Payment technology is already a massive market but the combination of the proliferation of commercial sales channels plus a continued move away from cash transactions (hygiene) could supercharge growth rates.
• Remote working
Another long-term trend that I expect to accelerate post-COVID-19 is the corporate acceptance of remote working. It will have major implications for certain critical industries. There is likely to be a long-term reduction in the demand for office space as well as a more immediate boom in technology associated with remote working - both physical infrastructure and supporting software.
• Growth in AI and Virtual Reality
Related to the debates above, I expect there will be increased recognition and utilisation of AI and Virtual Reality tools. It remains to be seen if successful utilisation of virtual reality can undermine the stranglehold that physical location-based businesses have on areas like training, events and conferences – a huge and extremely expensive component of corporate budgets.
• Growth in streamed entertainment
During the lockdowns, individuals were forced to find in-home entertainment as a replacement for traditional activities. While this is likely to be largely a temporary enthusiasm, some extremely well-established streamed activities will be able to use the COVID-19 experience as a platform for even stronger growth going forward.
3. Behavioural changes
• Hygiene
The effect of the COVID-19 crisis could be longer-lasting in hygiene and social distancing. A desire or even requirement for personal space – particularly in an indoor environment – will become embedded. This will challenge high-volume, low-cost business models where utilisation rates are crucial. Demand for hygiene-related products will remain elevated for an extended period.
• Sharing economy business models more challenged
Several global businesses and brands were established on the back of the growth in the sharing economy, such as Uber or Airbnb. With hygiene concerns, there must be doubt about whether their historical growth rates can be maintained. Any slowdown could have material implications for business valuations in the public and private capital markets.
4. New routes to market
• E–healthcare
COVID-19 will not only accelerate wellestablished growth trends but also catalyse emerging trends to become mainstream, such as e-healthcare. Consumer acceptance of remote diagnosis, engagement and even consultation during the lockdown will accelerate the attraction of e-business models focused on efficiency, immediate access and remote monitoring.
• E–education
The other significant opportunity that COVID-19 has spotlighted is remote learning. There are also opportunities for remote application in the corporate world, where location-based training is still a huge expense that could be transformed with the adoption of professional remote provision.
• E–financial services
The COVID-19 crisis, and particularly the corporate lockdowns, are magnifying the debate about an acceleration in the potential disintermediation of traditional financial services adviser/ physical contact models, to be replaced by platforms or remote AIorientated business models. It is likely that advice will remain a crucial part of the client relationship but may need to evolve with a focus on specific specialist skills.
• E-fitness
Lockdowns severely restricted people’s ability to exercise in a traditional way. Individuals have responded by exploring new home fitness opportunities – whether simple recorded fitness videos or the much more sophisticated multi-media orientated fitness-based products.
• Moderation in regulatory barriers to new technology
Prior to COVID-19 there was significant governmental, regulatory and media pressure to exert more control over large technology companies. In the war on COVID-19, large technology companies are suddenly seen as part of a solution rather than a problem. The effective dissemination of information and leadership in contact tracing are seen as opportunities for redemption for the technology companies.
5. Business challenges
A few issues associated with the post-COVID-19 world may challenge the ability of some companies to return to recent margin and ROCE peaks. Strategic asset allocation debates could look to challenge equity with better riskadjusted asset classes elsewhere in the capital structure (e.g. credit or separate asset classes like Infrastructure).
Apart from taxation, below are some of the issues that will face businesses globally:
• Business held more accountable to different stakeholders - I believe this will be the most significant post-COVID-19 business challenge, as bail-outs that have benefited the whole business community will raise the expectation that business should support a broader base of stakeholders, including governments and employees. Future dividend payments, and certainly share buybacks, will be scrutinised.
• Challenge to real-time supply chains - After product and component availability was highlighted in several areas, the super-efficient, real-time global supply chains that industry has relied on may be replaced with logistics that has some slack for business continuity. Future supply chains will probably need some flexibility, which would hurt profit margins.
• Assessing the permanence of changes In 2020, COVID-19 has undoubtedly driven a dramatic and sudden shift in financial systems and societies worldwide. The extent and depth of this impact still remains uncertain and is likely to be individual to each nation. Assessing whether changes across these many themes, both locally and globally, will be sustained is critical in steering our investment decision-making.
