Here are some of the key challenges and opportunities that investors need to position themselves around for the world after Covid-19, writes James Cheo
Many people are wondering what will the post-Covid-19 world look like. While in the short term, the market is focused on current issues such as the reopening of economies, it is imperative for investors to position for the world after Covid-19. So what are the challenges and the opportunities?
More indebted, slower growth, lower rates
In the next couple of years, governments and central banks will be the key economic agents driving growth globally. Government support measures have been crucial to helping households and companies bridge the Covid-19 crisis, but they will leave the world with significantly more debt. The Global Financial Crisis (GFC) has shown that higher debt loads led to lower trend growth.
In developed markets, there could be more rating downgrades. This is different in emerging markets, where there will be increasing differentiation, with China being one of the more resilient countries, while some Latin American countries might take a longer time to recover. Therefore, investors have to look beyond developed market bonds to Asia and selective EM credit to build income in portfolios.
Corporations will either swim or sink in a post-Covid world
Many companies’ balance sheets, debt loads and earnings would also have deteriorated during the crisis, prompting them to try to cut discretionary spending for quite some time after the virus has been beaten, weighing on cyclical industries. Companies may also reduce share buybacks and dividends, which could be a headwind for equity market performance.
Corporations in the technology, healthcare and consumer space are well-positioned to integrate its supply chain or buy up their competitors, essentially making them stronger after the Covid crisis. Hence, in a post-pandemic world, investors need to gain exposure into these quality companies so as to grow and preserve their portfolios over the long-term.
Healthcare’s drastic makeover
Even after the immediate Covid-19 crisis has ebbed, governments across the world will be raising healthcare spending, and will accelerate the upgrading of healthcare capabilities. And the healthcare sector will be embracing technology in its makeover.
Already, the Covid-19 experience has seen a big increase in the use of robotics in healthcare to minimise viral transmission. We also see an acceleration in the use of big data and AI-based medical diagnosis. Tele-health platforms are likely to become mainstream, and the sector as a whole is likely to see a big shift towards shorter supply chains as governments strive to have more critical medical equipment and supplies produced or sourced from closer to home.
These significant shifts makes health care investing extremely complex. One approach to consider is active management, which offers the benefits of diversification in tandem with skilled stock selection. Investors can also consider healthcare Exchange-Traded Funds (ETFs), which replicate the holdings of healthcare indexes, but does not have the active management of the fund manager.
Shifts in household spending patterns
Healthy food producers, meat substitutes, sports and health insurance are likely to see more demand. Even after Covid-19 is over, consumers will still be worried about picking up new viral infections, automation and no-touch technology should see rising demand. This includes contactless payments and autonomous transportation.
The new normal: live, work and play online
The shock of complete lockdowns has led to an almost 100 percent digital adoption. What’s more, consumers who have newly discovered the ease of online shopping and entertainment are likely to this new habit.
All of this is likely to result in a big increase in investments to boost capacity and bandwidth in the coming years – a trend that will benefit equipment providers, telecom companies, and companies that support the digital infrastructure of cloud computing and big data analysis.
Similarly, with work-from-home arrangements likely to become the new normal, demand for technologies that support the functioning of virtual offices and smart home systems should increase. This is not an entirely new phenomenon, of course: after all, commercial real estate companies have been adapting to changes in retail and flexible working for some time. But Covid-19 has massively accelerated the trend.
Position for the post Covid-19 world
The key to navigating short term headwinds is to build resilient portfolios – as we are looking at a U-shaped recovery – while also looking into the opportunities and the correct positioning for the longer term. In a post-Covid-19 world, investment themes we should be focusing on are areas that address the new normal and have long-term superior growth trends – such as technology, healthcare, automation, robotics and digital consumption.
James Cheo is Chief Market Strategist, SEA, HSBC Private Banking