How might we invest post-Covid-19? And will we think twice before boarding an airplane to attend a business meeting? Our 'The world after the corona crisis' report finds brief answers to big questions.
Digitalisation: A leap forward?
While the structural trend towards digitalisation was established well before the corona crisis, it has since shifted the speed at which it is occurring at least two gears higher. Digitalisation is happening on multiple fronts. E-commerce has been gaining grounds on retail stores for years, but it is likely the loss of revenues during the corona crisis that will deal the final blow to some of the struggling brick-and-mortar stores. Cash has already been slowly losing its dominant payment status against digital solutions such as debit and credit cards. The corona crisis has made the shift more rapid by adding a health risk argument to the existing convenience argument. In the current environment, the vast majority of music concerts have been cancelled and most cinemas have shut their doors; in exchange, video and music streaming is having a field day, with strong double-digit growth rates on a year-on-year basis.
For many companies, the corona crisis means that the longer-term threat of not being digital is becoming much more short-term. That said, the crisis is hitting hard not just companies, but also individuals. It is bringing the digital divide back to the forefront. Low-income families often do not have as many computers as there are household members, which is an issue when most school teaching has shifted online. Furthermore, low-income individuals tend to more frequently occupy jobs that are impossible to do in a work-from-home setup (fast food cook, cashier, etc.), which means that their income is more at risk. Within the work environment, and beyond the greater acceptance of work-from-home, we believe that business travel will be an area that might never reach pre-corona crisis heights. Companies will be trying to cut costs, portray themselves as environmentally friendly, and just acknowledge that quite a lot of deals can actually be done via video conferencing and do not require physical presence. Working from home naturally means more virtual connections, which in turn means more potential attack vectors for cyber criminals. Nonetheless, cyber security is most likely to receive only small funding increases in the short term, since companies are seeing their revenues disappear in the current crisis environment. The longer-term growth story, however, remains very much intact, as digitalisation increases.
Investing: A boost to booming sustainable investing?
Growing from a niche play to a more serious and sought-after investment strategy in the last couple of years, sustainable investing went through its baptism of fire during the financial turmoil caused by the corona crisis. Investors embedding environmental, social and governmental (ESG) aspects into their asset selection had long believed that sustainable investments would be more resilient in times of crises, which indeed proved true during this first test in early 2020. Index strategies clearly outperformed their benchmarks and the majority of sustainable funds held up better than peers. Some of them even maintained strong positive performance in the face of crumbling financial markets, not least due to a traditional sector bias towards information technology and healthcare, away from oil-related investments. But they also managed to outperform on a sector-neutral basis, as leading ESG corporates are likely less exposed to risk and more innovative, providing them with more cushion in difficult times.
The lockdowns during the corona crisis have had very tangible implications for a large part of societies worldwide, reminding us of the fragility of our economic systems in the face of unfamiliar shocks. The pandemic has produced a staggering disruption with deep implications for our economies as well as our private lives. It has laid bare the weaknesses of just-in-time manufacturing, complex international supply chains and fast, cheap consumer goods, and has stressed the importance of care and stable, resilient and sustainable structures. Moreover, to those fearing the coming implications of climate change, it may have felt like a dress rehearsal, increasing the urgency to act now. Thus, the corona crisis is surely a trigger for those investors interested in ESG but who are yet to invest in the theme.
For those already invested, on the other hand, the crisis might have served as an opportunity to get more deeply involved while the investment segment is maturing and more options have become available. Till recently, an important trend within ESG investing focused on the environment, as climate change is widely seen as the biggest challenge of our time. Lately, however, the focus has shifted to include the social aspect, a development amplified by the current health crisis. Customers and investors are increasingly shunning companies with precarious employment conditions (i.e. contract workers), and corporations have recognised that including the social factor can add value. More and more companies have stated the importance of creating value for all stakeholders, not merely the shareholders. This, together with increased regulation, will lead to better data for the social pillar too, next to already more established data on the environmental side. Having finally passed this crucial stage of a test in a downturn, sustainable investing now looks ready to take off. Demand is set to amplify as a result of the crisis, in a time when supply and professionalism are increasing as the investment strategy matures.
The Julius Baer 'The world after the corona crisis' report provides brief answers to big questions in the areas economics, politics, globalisation, society, inequality, healthcare, ethics, digitalisation and investing.
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