Covid-19: Thematic investing opportunities in pandemic times

The Covid-19 pandemic has dramatically altered not just the global economy but the world itself. Before the crisis, investors had already been pursuing thematic approaches to take advantage of trends in the global economy but a number of themes have emerged or accelerated over recent months.

“Be at Home”

Spending more time at home is perhaps the most obvious theme that has emerged in the pandemic. This includes many who are working from home and/or are being educated from home and/or are exercising from home.

I think of it as a much larger version of the ‘nesting’ theme experienced in the United States after 9/11, when many American households were fearful of traveling due to terrorism and spent far more time at home. Many people are spending money to renovate and retrofit their houses to their needs given they are spending much more time at home, and companies are spending more on technology to ensure employees can work efficiently from home.

Beneficiaries include a variety of technology companies, especially software, storage and security. Other beneficiaries include home improvement companies, online education companies, and digital health companies.  All these themes should endure post-pandemic, although with varying degrees of popularity (online education being the least popular given the difficulties associated with at-home learning for children).

E-commerce

Purchasing goods online is a long-term trend that accelerated dramatically during the pandemic for obvious reasons. The safety and ease of pressing a button at home and having goods delivered to one’s doorstep has proved indispensable during the pandemic.

We expect the types of goods and services sold online are likely to expand as the pandemic continues. Even when the pandemic has ended, e-commerce retailers are likely to retain a much higher share of overall retail sales than pre-pandemic. 

Artificial intelligence

Artificial intelligence (AI) is a powerful innovation and demand for it has only accelerated in the pandemic. For example, imaging methods and tools that utilize artificial intelligence are becoming increasingly useful in the detection and diagnosis of Covid-19.

More generally, AI is helping many businesses become more efficient and work smarter in this difficult environment. Natural language processing (NLP) is a sub-set of artificial intelligence that is specifically concerned with the interactions between human linguistics and computers such as speech recognition.

AI also has the potential to dramatically enhance productivity, and so it is a powerful trend that has staying power beyond the pandemic.

Automation – drones and robots

The pandemic has underscored the need for robots and drones to perform essential tasks without the possibility of catching or spreading the virus. For example, the more robotics on an assembly line, the less vulnerable it is to closure because of Covid-19.

Similarly, drones are being developed to deliver goods, which would also help to reduce the vulnerability of an essential service during a pandemic. Beyond the pandemic, automation is likely to accelerate even further because of the productivity enhancements and cost efficiencies it provides.

Financial technology

Another trend that was accelerated by the pandemic is cashless payments. The spread of Covid-19 has decreased the use of cash because of concerns that the physical exchange of money could spread the virus.

A number of financial technology companies have benefited from this trend, which is likely to continue post-pandemic. One significant fintech beneficiary of the pandemic should be blockchain, which has applications in many different industries, and can help facilitate commerce without physical contact.

For example, public land records can be digitally recorded via blockchain, eliminating the need for physical record examinations as part of a title search. While this is particularly helpful in a pandemic, it is also more efficient and so is likely to be a trend that has staying power. Interest is also growing in tokenization and distributed ledger technology.

De-Globalization

The pandemic has accelerated the trend towards de-globalization. De-globalization has already been on an upswing over recent years, particularly since the US-China trade wars began. It has only accelerated as supply chains have become disrupted by the pandemic, increasing the desire for companies to ‘onshore’ production capabilities.

As McKinsey recently noted: “The tendency toward nationalism was already strong and is growing during the crisis.” It remains to be seen whether this trend continues and this may be dictated by the outcome of the 2020 US presidential election.

The Great Reset – ESG

The pandemic of 2020 and ensuing economic recession is being viewed as a possible catalyst for a ‘greener’ economy and, more generally, a greater focus on ESG. This could turn out to be a moment of ‘creative destruction’, with a deep recession begetting a better and more environmentally friendly economy.

As Kristalina Georgieva, Managing Director of the IMF, stated: “Will historians look back and say this was the moment of a Great Reversal? Today, we see very worrying signs. One hundred and seventy countries are going to finish this year with a smaller economy than at the start of the year, and we already project that there will be more debt, bigger deficits, and more unemployment. And there is a very high risk of more inequality and more poverty. Unless we act. So, what would it take for historians to look back at this crisis as the moment of a Great Reset? From the perspective of the IMF, we have seen a massive injection of fiscal stimulus to help countries deal with this crisis, and to shift gears for growth to return. It is of paramount importance that this growth should lead to a greener, smarter, fairer world in the future.”

There seems to be a public will in many countries to have a Great Reset, and so perhaps the momentum is there to see it come to fruition.