OCBC OneWealth App– Winners and losers amid structural shifts

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Covid-19 global pandemic

Winners and losers amid structural shifts

27 August 2020

Picking winners in a post pandemic world

When Covid-19 first hit, few could have predicted that it would cause countries to shutter non-essential business, close borders and push central banks and governments to do whatever it took policy-wise to put a floor under economies in virtual free fall.

Weeks into the lockdown, the thirst for normalcy has grown. Will we return to a world we once knew when countries reopen? Or are we destined for a new normal, one defined by physical distancing, staying indoors and being less social.

Until a credible vaccine is discovered, produced, and widely distributed, the latter would likely be the way of life for some time to come.

Stay-at-home economics: Tech – a key partner in communications and consumption

Communications

In a world of physical isolation, staying connected has never been more important, whether for work, education or just personal well-being. Communication technology is vital to serve these needs. People will continue to work remotely; students will continue to be engaged in home-based learning and a slew of other services that were traditionally rendered face-to-face like financial advisory and doctor visits might now occur over secured digital channels.

Digital entertainment content and online video streaming may replace cinemas for the time being. Ultimately, offline interactions and social activities are likely to shift online, wherever possible. Sustained increase in the usage of these digital platforms on a daily basis would inevitably increase the demand for robust technological infrastructure that can support a more vibrant life online.

Consumer

e-Commerce will likely stand in for the offline retail experience for some time to come as well. The retail sector had already faced intense disruption and competition from the rise of e-Commerce platforms like e-Bay and Amazon. Having a brick and mortar store is no longer seen as a necessary condition to survive in the world of retail, amid an environment increasingly dominated by online shopping. This has been further exacerbated by the Covid-19 pandemic, where a place of social gathering is seen as a threat to public health. What use is a store if shoppers are not allowed in. In a world where people are told to minimise social interactions for their safety, how else would they scratch their itch for consumption if not for online shopping.

It’s not just discretionary consumption that has been impacted by the rise of online retailers. Due to the virus, online platforms have been the go-to option for purchases of consumer staples like groceries and household supplies. Procuring sustenance is as easy as opening an app, as people increasingly turn to food delivery services at a time where physical contact is largely feared and frowned upon.

Still, there is a seemingly irreplaceable feel-good factor and experiential quality from interacting and shopping offline that - try as companies might - is difficult to replicate on a website or an app. As shops and restaurants reopen, footfalls will naturally increase as people seek out such social experiences - we are social animals, after all. But, against the backdrop of the Covid-19 virus, e-Commerce might have supplanted malls and traditional brick-and-mortar stores as the default shopping destination.

Yet, it is not likely that consumers will eschew one for the other. Offline and online retail channels will likely find a new equilibrium in a post pandemic world, although the path to a new balance might not be entirely smooth. Especially among retailers, there will likely be a reassessment of the need to maintain an offline presence.

Technology

Amid new social distancing norms, it’s little wonder that technology stocks have rallied so much.

The acceleration in the shift from offline to online channels in almost all aspects of business from e-commerce to communications and entertainment, has boosted the appeal of technology companies which are well positioned to benefit from a digital, post-pandemic future.

Some of the changes in behaviour prompted by Covid-19 are likely to persist well beyond the current crisis and would provide a secular growth tailwind for companies that are positioned to capture the incremental demand for such services. As businesses adapt to shifting consumer behaviour and new regulations, this would also drive their investments in industrial and service automation, creating new sustainable investment opportunities. Software, internet, cloud computing and semi-conductors will likely be the beneficiaries in this scenario.

Don’t forget healthcare

The current Covid-19 crisis has focussed attention on matters of personal health and scientific research. Growing demand for healthcare services and products is likely to persist well beyond the current crisis. This will provide a secular growth tailwind for companies that are well-positioned to capture the incremental demand for services and products such as online pharmacies, telehealth providers, vaccines, testing kits and personal protective equipment.

Not without its challenges for certain sectors

The new normal will inevitably present structural headwinds for certain economic sectors.

For one, physical distancing and other public health measures introduce additional costs to businesses whose revenue generation depend largely on the movement of people, face-to-face interaction or selling an experience.

Airlines

International travel might not recover to pre-coronavirus levels in the near term considering the imposition of more stringent conditions to safeguard public health, including the need to keep passengers further apart, enhanced health-screening procedures and quarantining visitors for two weeks on arrival. Surely, these serve as disincentives to travel for leisure.

Business travel will take a hit as well, as companies increasingly shift cross-border interactions online. The combination of these factors translates to significant demand destruction for the airline sector.

Hotels, gaming/casinos

Hospitality, restaurants, bars, theatres, casinos and cinemas are among businesses that will face a challenging environment ahead. These businesses are inherently social and therefore potentially more vulnerable to community spreads of the virus. It’s certainly not the case that these businesses are untenable.

Quite the opposite. People will yearn for such social or community experiences. Just look at bars in New York and London when lockdown measures were eased on slightly to allow for in-room dining. The more realistic outcome is that these businesses will not be able to run at full capacity given the need for physical distancing and crowd control in the time of coronavirus. A challenging outlook, indeed.

Real estate

Meanwhile, structural increase in remote working arrangements and the shift towards online shopping, learning and entertainment will reduce demand for office and retail spaces.

In this case, the real estate sector might face structural headwinds.

Autos and energy

Work-from-home arrangements, curbs in international business and personal travels and a general decline in mobility and commutes will hurt demand for autos and, by extension, fuel.

In the absence of further supply cuts by major oil producers, oil prices may trade at lower levels, reflecting structurally weaker demand. This might hurt energy companies.

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