In my previous article in this two-part series, I looked at how consumer behaviour is changing as a result of the ongoing Covid-19 crisis. As people’s attitudes, spending patterns, working lives, and behaviours evolve to accommodate a new reality, each enterprise in the world will also need to adjust how it operates to minimise the damage or risks to its business model – or to maximise the opportunities.
As I noted in my previous column, the pandemic is, for the most part, accelerating and amplifying existing trends rather than creating new ones. And where we see transformative changes in how businesses operate, the question remains open about how long these changes will prevail should a vaccine or an effective treatment bring the crisis to an end.
Nonetheless, the ways in which businesses operate and how they spend and invest money is likely to remain disrupted for at least another year to 18 months. In much the same way as the effects of the global financial crisis still reverberate, the economic impact of the coronavirus will be with us for years to come, both at a micro and macro level.
Here are a few ways we expect the pandemic to change the landscape in the short to medium-term:
An accelerated shift to digital channels
High-street retail has endured a difficult few years in North America, Europe, and parts of Asia as consumer adoption of e-commerce has grown. Covid-19 has accelerated that trend, with one report estimating that it would have taken four to six years under normal circumstances to achieve the volumes of e-commerce the US experienced in May this year.
This has been bad news for retailers that have struggled to pivot to e-commerce: a recent report from S&P Global Market Intelligence identified 40 major retailers in the US that have filed for bankruptcy in 2020. It is expected that more retailers will file for bankruptcy this full year than in 2010 in the wake of the global financial crisis.
Even if the pandemic ends relatively soon, we can expect many consumers to stick to the habits they learned under lockdown and during a period of prolonged physical distancing. Organisations that don’t have a robust strategy for moving towards digital channels will struggle to survive the next few years.
Work from home to remain the norm?
People around the world have been encouraged to work from home if possible since the global Covid-19 outbreak started. Some small hiccups aside, even banks and insurance companies with large, centralised call centres have been surprised how easy the transition to remote working has been. The technology works, and people and processes have proven to be quite adaptable.
Surveys around the world indicate that many companies expect working from home for a larger portion of their workforce to become normal. According to one survey, business leaders expect a nearly 50% increase in employees working from home post Covid-19. In the UK, more than a quarter of organisations’ teams are expected to become permanently remote.
The ramifications are massive. What happens to commercial real estate in large cities when companies permanently reduce the size of their head offices? And what about the ecosystems of suppliers and service providers that exist to serve large companies and their employees in any world city centre? And when someone can work from home, does it matter if home is the US or India?
Conversely, although remote working has distinct benefits, it is noteworthy that even some leading global tech companies are aware of its limitations. For example, Reed Hastings, co-chief executive of Netflix, recently was quoted in answer to whether he has seen benefits from people working from home: ‘No, I don’t see any positives. Not being able to get together in person, particularly internationally, is a pure negative…’
In this uncertain time, we can expect companies to cut costs where they can. For some, the pandemic has provided the perfect mantle to increase automation and downsize their headcounts. Others will be preserving cash flow and reducing capital expenditure in the expectation of a coronavirus rebound and more market volatility.
PwC’s Global CFO Pulse Survey shows 82% of CFOs are cutting costs in facilities and general CapEx, with many also considering cost cuts in operations (47%), workforce (40%), and IT (31%). The impact could be widely felt – when an organisation cuts costs, it usually harms other companies in its value chain and the associated job losses mean there is less consumer spending to go around. After all, continued rounds of central bank stimulus are not sustainable indefinitely.
Bracing for protectionism and de-globalisation
The US’s ongoing trade war with China and the UK’s retreat from the European Union are symptoms of growing disillusion with globalisation in many parts of the world. The pandemic may well amplify the shift towards a protectionist outlook we have seen in some countries in recent years as governments encourage a ‘buy local’ philosophy to prop up their economies.
Some countries such as Canada and European Union member states are also taking measures to protect their strategic companies and industries from hostile foreign takeovers during the pandemic. And of course, difficulties with travel and blockages in global logistics are also forcing many companies and consumers to seek alternatives to the imports they usually buy.
Winners and losers
Given that background, we can speculate on who some of the winners and losers will be in the wake of the pandemic. International tourism, business travel, hospitality, traditional main street retail, and aviation face a long, difficult road to post-pandemic profitability, and it is likely that only those with exceptionally strong balance sheets or access to government funds will survive.
Construction companies too will have a tough time in the medium term, although they may benefit from government stimulus spending as the pandemic tapers off. Commercial property – a cornerstone of many pensioners’ portfolios – is likely to be deeply changed in a new normal where people spend less time in malls and offices. Banks and insurers are in better shape than they were in the financial crisis, but we can’t discount the impact that bad debt could have on their financials in the months and years to come.
The winners so far include the big techs like Microsoft, Amazon, Apple, Tencent, Netflix, and so on. As of 30 September, Amazon and Microsoft have market capitalisations of approximately $1.6 trillion, with Apple’s exceeding $2 trillion. While the pandemic has enabled these companies to consolidate their market position, one wonders if a bubble might be forming in the tech space in terms of valuations, with Tesla being a recent example.
We humbly acknowledge that it’s not possible to time the market or predict what the future holds. For that reason, we continue to position portfolios in quality with a focus on well-run companies with strong management teams and predictable earnings in counter-cyclical sectors. As mentioned above, we are somewhat concerned about market valuations in some sectors, so we are managing this risk.
As an additional drawdown mitigation strategy, we have also taken the decision to purchase portfolio insurance for the next 12 months to shield our investors in the Dynasty proprietary funds against the possibility of a severe market correction.
Through these two approaches, we believe that our investors will continue to be well exposed to winning companies in the pandemic environment, whilst our portfolio protection will guard against macro adverse shifts in the economic landscapes.