The scope of the events we are living through goes well beyond the economic aspects, and the depth and multiple ramifications of this crisis imply sustainable, and perhaps structural, changes to our lifestyles. However, says Gilles Prince, everything may not be so negative, as some sectors and investment themes could benefit from the exit from the crisis.
The human toll is heavy, both physically and morally, health systems are pushed to their limit, the number of bankruptcies is increasing and millions of jobs have been lost. This crisis affects billions of people around the world in what looks like a major recession, the first in twelve years.
First, from an individual point of view, the lockdown creates new needs, at the social and recreational level as well as for remote working. We are realising the importance of high-quality IT equipment, a safe and fast network, or sufficient bandwidth, for example. Our health safety has become a priority, home-delivery of goods and products is critical in some cases, and the lockdown situation creates a greater need for physical or intellectual activities.
Even though the Federal Reserve is now buying lower-quality US bonds, the amount of low-quality debt at the limit of junk status is colossal, showing the vulnerability of these companies' balance sheets in the event of a prolonged recession or a rise in interest rates."
These examples, among other things, show that the nature of our consumption habits has been affected, as have the quantity and amount, with the economic uncertainty tending to foster a cautious attitude and a rise in precautionary savings.
At present, we see that the stock prices of companies active in the "stay at home" theme are not only beating the benchmark indices, but are also reaching new highs. The Internet and technology sectors are leading the pack, including e-commerce, media platforms, video games, social networks and secure connections.
This is likely to be a peak in demand and temporary interest from investors due to the lockdown, as a return to normal will logically see this interest turn to services related to the recovery - once the terms and conditions become known. This said, it is not certain that we will fully return to the previous situation, as our habits have changed and could strengthen or accelerate the trends already in place.
Thus, the need for fast connections to the large volume of data could support the adoption of 5G. Cybersecurity problems are more visible and more frequent, and personal data protection has become a sensitive, even critical, subject. After data collection, the use of this data will be at the forefront in coming years, for example to trace the proximity of smartphone users.
At the health level, we may also pay more attention to our care and protection, which would support this sector. As a result, in general, the technology and healthcare sectors should continue to drive the performance of stock market indices.
As far as companies are concerned, we can also draw interesting lessons about the impact of the crisis on the various business models. "Globalised platform" companies, for example with Asian production, Western design and sales, and tax-optimised revenues, to avoid the term offshore, will probably not be the winners of tomorrow.
The global supply chain model and the "just-in-time" concept with optimised inventories have revealed their limits when freight transport becomes problematic and production depends on too few suppliers or a key intermediary. A review of this model could strengthen the trend towards the regionalisation that was already underway, notably following the trade war that began more than two years ago.
A repatriation of production could then lead to greater automation, perhaps rather than taking on a local workforce that in some cases could be costly. Diversifying supply sources could therefore support domestic industries and reduce longdistance freight transportation. The robotisation theme could be strengthened.
It should also be noted that the financial consequences of the crisis have highlighted the vulnerability of some companies, particularly those that have over-optimised their balance sheets by increasing their debt ratio. Even though the Federal Reserve is now buying lower-quality US bonds, the amount of low-quality debt at the limit of junk status is colossal, showing the vulnerability of these companies' balance sheets in the event of a prolonged recession or a rise in interest rates, albeit unlikely in the immediate.
Companies with a healthy balance sheet, liquidity reserves and not facing short-term refinancing problems should logically be the favourites of investors, who above all are seeking safe securities capable of weathering this crisis. Investors' bias towards quality and growth will continue to gain importance.
The abrupt halt of economic activity has also highlighted a winner: the environment. The visibility of the industrial impact on pollution is significant, both with regard to wildlife and air quality, and could lead certain governments, companies and citizens to give it more consideration. We are realising that some changes in behaviour or environmental measures could have a positive effect on our quality of life.
Here too, a change in our habits, with more remote working and less travel, could lead to a lasting positive transformation. Combined with the interest in quality companies mentioned above, it is very likely that interest in the socially responsible investment theme will increase.
Ultimately, the conditions of the lifting of the lockdowns and economic recovery are still uncertain, but as companies are valued based on the principle of discounting expected profits, investors are starting to look beyond the dip and seek out the stocks and sectors that will recover the fastest or that will benefit from the changes brought on by the pandemic.
In the future, it is clear that we will move towards more digitisation and less globalisation, but also toward quality stocks with robust balance sheets, taking into account their social and environmental impacts.
Gilles Prince is chief investment officer, Private Banking, at Edmond de Rothschild, in Switzerland.