When it comes to evaluating which companies may flourish and which may struggle following the disruption of Covid-19, studying underlying business models is more revealing than reviewing traditional sectors.
Conventional industry classifications were becoming less insightful as company business models have evolved.
For example, is Amazon a technology company, a retailer or both? Now, Covid-19 will alter long-term customer behaviour and change the nature of their transactions.
For asset managers, having different perspectives and debating different views within their research teams often delivers the greatest insights.
In looking at the long-term implications of the pandemic, we have split business models into three groups, identifying how the shifts in consumer behaviour resulting from Covid-19 are likely to impact their recovery prospects.
Broadly speaking, the three categories are:
• Negative impact – business model not expected to recover to pre-Covid-19 levels, for example traditional retail.
• Unchanged – business model expected to recover to pre-Covid-19 levels, for example pharmaceuticals.
• Positive impact – business model expected to exceed pre-Covid-19 levels, for example internet retail.
Without a doubt, Covid-19 is a significant turning point and will have a long-term impact. Depending on when a vaccine comes to market and how widely it is adopted, Covid-19 is still likely to alter people’s behaviour for years to come, changing how consumers interact with companies.
But it is not just a company’s relationship with its ultimate customer that is impacted. Supply chain resiliency and flexibility has become more critical than pure efficiency.
- There are three different business models that will respond to the pandemic
- The crisis has accelerated long-term trends
- Social issues have become more important
Those companies with the means to not be locked into current infrastructure, or able to pivot quickly, could gain share.
To a certain extent, the crisis has accelerated long-term trends that were in place beforehand. If there were three areas that were important to understand before the crisis, they were: technology, healthcare and the financial ecosystem. As the pandemic accelerates existing economic and social trends, it has magnified the importance of these three themes.
Technology and healthcare will be key sources of future sustainable growth. And understanding financial liquidity is critical, because readily available capital greases the global economy.
The soundness of the financial system is critical for all businesses in order to identify potential pain points, key investment risks and opportunities.
A spotlight on social issues
Discovering opportunities and challenges that the market has overlooked would not be complete without responsible investment or environmental, social and governance research, particularly because the pandemic has highlighted social issues.
ESG is a non-financial measure of a company’s quality that complements financial analysis.
It reveals how well a company has thought about elements of its operations, including the quality of the management and rigour of the governance structure. It signals how well it is likely to be able to grow organically, as well as how adaptable and innovative it is likely to be.
After Covid-19, social issues will be more important, with major implications for businesses. It is important for both traditional and responsible investment professionals to engage companies and learn about how they are responding to the heightened sensitivity towards social issues.