What’s the potential impacts of the COVID-19 virus on consumer behaviour and how it can determine some of the companies and sectors to invest in. (3:36 min read).
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
Many financial commentators have already written about the COVID-19 virus and its dramatic impact on the economy and financial markets. Goldman Sachs has recently updated its 2Q 2020 U.S. forecasts and its dire; GDP forecast to an annualised -34% with unemployment potentially reaching 15%.
Fortunately, they are forecasting a recovery in 3Q 2020 as U.S. government stimulus reverses some of these forecast numbers and the worst of the COVID-19 virus impact is over. Something similar could also occur for wealthier developed nations such as Australia, which can afford such fiscal and monetary measures.
However, many developing countries lack the same health and economic levers and resources to soften the economic impact of the COVID-19 virus, so a quick global recovery is unlikely.
In this article, we want to specifically explore the potential impacts of the COVID-19 virus on consumer behaviour and how it can determine some of the companies and sectors to invest in.
Changing human psyche and consumer behaviour
Depending on how long the COVID-19 virus continues to materially impact our lives, it is likely that there will be some long-term changes to our human psyche and consumer spending patterns.
With so many people facing sudden unemployment and suffering from a downturn in financial markets, it is likely many people will become more conservative in terms of their consumption and focus more on savings notwithstanding the various stimulus packages being offered by the Government.
Some consumption areas are likely to see structural changes such as travel, particularly on cruise lines and our dependence on air travel. Business and holiday travel will still occur but the advent of technology such as personal video conferencing may remove those business trips deemed unnecessary and frivolous.
As such, many businesses and industries will also likely have to change their practices. For example, balance sheets will have to be more conservative (despite interests being low globally) including a slowdown of corporate buybacks and potential reduction of dividends, as cash is preserved.
Flexible work arrangements, which have already been a trend will become the norm and the increasing use of big data will likely become more prevalent as consumers accept that such tracking and monitoring is an effective way to minimise the spread of future infectious or viral illnesses.
Portfolio positioning and ideas
With so much remaining uncertainty, we believe it is prudent to remain conservatively positioned. Markets will remain volatile until we see sustained progress in containing the COVID-19 virus globally.
Further, there are other externalities such as an historically low oil price to contend with as well as the longer-term consequences of government stimulus on their balance sheets and respective currencies.
However, there are clearly some early winners and industries and businesses that will prove to be resilient in this type of environment.
- Consumer staples such as Nestlé, Danone and Walmart as well as local names like Coles and Woolworths, particularly as lockdowns remain in place and consumers swap restaurant and entertainment consumption with grocery consumption.
- Technology companies focused on fields such as big data, e-health, online education and personal video conferencing such as Zoom Communications as well as online video streaming (Netflix and Disney).
- Large cap technology companies such as Microsoft, Amazon and Alibaba have strong balance sheets and will not only do well in the current environment (such as increased online spending for Amazon and Alibaba) but also participate strongly in any economic recovery.
- Cashless payment companies such as PayPal, Visa and Mastercard will offset some negative impact from reduced offline spending with increased online spending and a further move away from cash.
- In the current lockdown environment, food delivery companies such as Just Eat, Delivery Hero and Uber Eats (owned by Uber) are clearly benefitting from increased delivery volumes.
- Chinese consumption plays will benefit as China looks to lead the world in recovery from the COVID-19 virus and the Chinese government bolsters consumer spending. This will benefit the likes of Tencent to many other Chinese consumer companies including Pinduoduo and Meituan Dianping.
- As China re-opens, steel and other resources could also be secondary beneficiaries such as Fortesque Metals.
In assessing these opportunities as potential investments, we obviously need to take into account current valuations and balance sheet strength while being especially mindful of the broader economic environment and potential for further volatility.
Despite this market environment, we believe there will always be investment opportunities for those focused on the long-term horizon.
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