The COVID-19 pandemic has pressed the fast forward button on the structural changes which were already taking place around the world, which have been part of our investment discussions for years. Microsoft CEO, Satya Nadella, said they’ve seen “two years’ worth of digital transformation in two months” and MasterCard reported a 40 percent increase in contactless transactions worldwide.
No surprises then that online shopping is booming: in the four weeks to 14 June, online grocery sales in the UK were up 115 percent compared to the same period last year. This has been matched by a rise in cybercrime as one hackers-for-hire group alone has set up 27,000 malicious web pages to enable phishing attacks.
You will have heard us talk about the rapid pace of digital transformation before, but it’s not just technology companies that are experiencing this rapid pace of change. The delivery of goods and services across all sectors is changing, with many old practices being abandoned for good. “Resilient” and “futureproof” are the buzzwords for businesses now as they seek to adapt in order to ensure they can continue to deliver in all circumstances and meet rapidly changing consumer habits.
Companies that were already well-placed to benefit from the trends or are flexible enough to adapt are the ones that will survive and thrive in this “Darwinian shake-up”. We are optimistic that the companies in our portfolios tick these boxes, thanks to our investment process which seeks out companies swimming with the tides of change.
The new normal of face masks and home working has led to a surge in facial plastic surgery in South Korea, with patients able to hide the tell-tale signs of swelling. Remote and digital healthcare solutions were already gaining traction thanks to a rare ability to meet the needs of both an ageing population (treating them closer to home) and millennials (delivering health services on demand).
In 2020, the need to keep people out of hospital has become ever more urgent. Healthcare IT company Cerner is clearly well-positioned to benefit from this trend, but other companies are too. Fresenius Medical Care is investing in the roll out of best-in-class equipment to facilitate home dialysis treatment. LabCorp has spent years building up consumer-centric services such as home-testing kits and testing centres outside hospitals while Align Technology designed its Invisalign braces specifically to require fewer visits to dentists.
From “just in time” to “just in case”
From sourcing raw materials, to manufacturing and delivering to customers, companies are adapting their business models in response to the changing global environment and consumer preferences. Changes to supply chains have been underway for a while as increasing environmental regulation, greater protectionism, and the US-China trade war have chipped away at the case for ever more globalisation.
But the pandemic has certainly sped things up: the Covid-19 outbreak has left management teams in no doubt about the importance of diversified supply chains. In a UBS survey of CFOs, 44 percent said the pandemic has increased their intention to relocate manufacturing. If this persists, it has the potential to remove one of the great deflationary pressures of the last few decades.
At the delivery end of the spectrum, big developments are occurring too. An expert in logistics for a UK supermarket told us that in the current environment, the red tape has melted away: projects that would have taken two to three years under normal circumstances have been completed in a month.
Of course, in these uncertain times, resilient must also mean flexible. Consumer habits are unpredictable. Sharing his insights with the Veritas team, a luxury brand expert identified two potential shopper-types post-lockdown: “careful shoppers” who will continue to moderate their spending habits and “revenge shoppers” who will spend with abandon as they try to make up for lost time. The military warns us that generals who “fight the last war are likely to lose the one they’re in”: companies must remember that the next crisis is unlikely to be the same as this one and we look for management teams who build adaptability into their business models.
Never waste a crisis
Taking a step back, many believe this is the time to build resilience and flexibility into society too. Governments and institutions have poured resources into finding solutions for firstly the health emergency and then the financial one. UK government debt reached 100 percent of GDP for the first time since 1963 as job centre claimants rose 126 percent after lockdown was introduced.
Globally, central banks have now committed over $17 trillion to tackle the economic impact of the pandemic, dwarfing the measures introduced through the 2008-09 global financial crisis and with a much shorter delay. As attention now turns to rebuilding, questions are being asked about whether we can use this as an opportunity to tackle some of the broader issues society faces, such as climate change and inequality.
Milton Friedman famously said: “Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around”. Well there are plenty of ideas out there: carbon taxes, universal basic income, circular economies, well-being economies, debt write-offs…
But as you know, we don’t make economic predictions and this crisis has certainly not tempted us to start trying. For all the havoc it has wreaked, Covid-19 has not changed our investment philosophy. We remain focused on protecting and growing our clients’ assets to ensure they meet their long-term inflation plus targets by seeking out companies with strong balance sheets, resilient and adaptable business models and a culture which focuses on long-term sustainability. We are certain that this will be the case regardless of how the picture looks when those jigsaw pieces finally settle.
Media contacts: cmair@veritasinvestment.co.uk