There has been a plethora of speculation about what the world will look like post-COVID-19.
It’s hard to even imagine that world at this point but in the 1920s people spared by the global influenza outbreak eventually got back to a semblance of normality and we will too. (Leaving aside the argument society should not go back to the old normal and should use this crisis as a catalyst for change.)
It’s too overwhelming to try to predict every angle of what a post-COVID planet will be like so we’re sticking to our knitting and focusing on investment ideas.
We do that thanks to an excellent and epic BCA Research special report entitled, unsurprisingly, The World After COVID-19: What Will Change, What Will Not?
It’s written by Garry Evans, Senior Vice President of Global Asset Allocation at BCA Research, complete with 31 charts.
We’ve culled it down and focused on the sectors and types of companies BCA Research believes will be long-term winners:
Health Care, Technology, Automation, Robotics, and Capital Goods.
Here now are a few excerpts from BCA Research’s report:
A recent report by BCA Research’s Global Asset Allocation service argued in detail that the macro environment for global health care equities will remain very positive in the coming years.
An aging population in the world, and a growing middle class in emerging countries will steadily raise demand for health care services (Charts 23 and 24).
China, in particular, has underinvested in health care: It spends only 5% of GDP, barely higher than it did 20 years ago, and well behind other emerging economies such as Brazil and South Africa (Chart 25).
Positives For Health Care Include An Aging Population…
As a result of the COVID-19 pandemic, governments everywhere will need to spend more money on health care (or, in the case of the US, perhaps spend it more effectively).
In the US, before the pandemic, intensive-care beds were sufficient to cope only with the peak of a normal seasonal influenza breakout.
The World Health Organization warns that, while pandemics are rare, highly disruptive regional and local outbreaks of infectious diseases are becoming more common (Chart 26).
More money will need to be spent, in particular, on developing health care technology (online consultations, digitalized patient records, track-and-trace systems), on improving senior care homes (80% of COVID-19 deaths in the Canadian province of Quebec were in such facilities), and on biotech (such as gene-related therapies).
The health care equity sector is not expensive, trading in line with its long-run average valuation (Chart 27). Within the sector, biotech and health care technology look more attractive than pharmaceuticals, which are expensive and vulnerable to the price caps proposed by Joe Biden if he is elected US president this November.
Health Care Stocks Are Not Expensive
In a bevy of ways, the pandemic has propelled the use of technology: For working at home, communication, online shopping, entertainment, etc. Companies such as Zoom have moved from niche players to mainstream business providers: Zoom’s peak daily users rose from 10 million in December 2019 to 300 million in April.
Assuming that at least some of these developments remain in place once the pandemic is over, it is easy to see how technology stocks (broadly defined to include any company that uses information technology as a central part of its business) will continue to prosper.
These stocks will not be just in the IT sector, but also in communications and consumer discretionary.
Picking Individual Winners Will Be Hard
- Will Microsoft overtake Amazon in cloud computing?
- Will Zoom’s much-discussed privacy issues undermine it?
- Will competitors emerge to Shopify in merchant services?
- Can Spotify compete with Apple in online music streaming?
But the broadly-defined sector seems likely to have improving fundamentals for some years to come.
The only question is whether the good news is already priced in, after the huge run-up in stock prices over the past few years. We do not believe it is fully.
The valuations of these sectors are still nowhere close to the level they reached at the peak of the technology, telecom, and media (TMT) Bubble in 1999-2000 (Chart 28), they have strong balance-sheets, and considerable earnings power.
For their outperformance to end, it will take one of two things. The first trigger could be a significant shift down in growth.
Over the past three years, Amazon has grown EPS at a compound rate of 47%, and Netflix at 76% (Chart 29).
Over the next three years (2020-2023), analysts forecast compound EPS growth of 32% for Netflix, 30% for Amazon, 15% for Facebook (compared to 24% in 2016-2019), and 12% for Microsoft (compared to 16%). Those are still impressive growth numbers, and should be achievable as long as these companies can continue to grow market share.
Can The Big Tech Stocks Keep Growing Earnings At This Rate?
The second set of risks would be regulatory: A move to break up companies such as Google and Amazon, the US introducing data privacy legislation similar to that in the European Union, or a move to a digital tax or minimum global taxation. None of these seems likely in the immediate future.
The return, at the margin, of some manufacturing to the United States (and other developed economies) will bring about economic changes.
Unable to tap into the pool of cheap international labor as easily as before, companies will have to invest significantly in this sector. This will result in the following:
- A resurgence of manufacturing productivity, thanks to increased investment.
- An intensification of automation. The US will need to boost the number of robots per capita to compete with Korea, Germany, and Japan. This will further improve productivity.
- The development of a high-tech manufacturing sector. Analogous to the FAANG stocks during the 2010s, a new group of innovative manufacturing companies could emerge.
New infrastructure, roads, factories, and machinery will be needed to replace what is now an outdated capital stock in the US.
These trends should all be positive for the capital-goods sector. Such a project would also need large amounts of raw materials.
This might push up the prices of commodities such as industrial metals, and benefit materials producers.
As mentioned above, it could boost the price of real estate outside of the major cities, where the new manufacturers would be likely to set up.
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