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.
Key points
- 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.
For example, in a recent engagement call with a company, management outlined their detailed plans around keeping employee health and wellbeing a priority at this time.
The path to recovery
Rarely has there been a greater need for analytical insight. The path to recovery will necessitate one or multiple vaccines coming to market, which we expect on a limited basis by the end of this year and broader availability during 2021.
Over the next two years, companies will have to endure a testing environment.
For example, we believe that the most likely path of recovery for the US economy is U-shaped, with a possible re-emergence of the virus later in the year, a 6 per cent to 8 per cent decline in US GDP growth in 2020 and eventual economic recovery in 2022.
Our equity researchers anticipate US aggregate revenue and net income to recover faster than the economy as larger cap companies with exposure to durable growth outpace the broader economy, with levels returning to fourth quarter 2019 figures by the middle of 2021.
However, the estimates from our credit teams highlight that the recovery is not expected to be even across all business models, with those identified as being negatively impacted by Covid-19 struggling to recover over the next three years.
In the European high-yield market, the additional leverage typically found on corporate balance sheets amplifies the importance of correctly assessing how different business models will be affected over the longer term.
The scale of the demand shock seen in cyclical or particularly exposed sectors is likely to stretch liquidity and increase leverage this year.
However, following an unprecedented wave of state-backed liquidity measures, most companies have the financial flexibility to respond by restructuring and re-shaping where necessary.
As such, businesses with strong market positioning in sectors that are likely to (at least partially) recover have the potential to emerge from the crisis with leaner cost bases and sound cash generation.
Independent research
This is also a time of great change in people’s behaviour, the interaction of consumers with businesses and the nature of transactions.
Some of the long-term impacts such as more working from home and using less office space are well known, but how that ripples out through different business models and across supply chains is not.
This pandemic is a big moment for economies; a rare event that truly deserves to be described as a crisis.
Analysing its impact on different business models with a laser focus is where one can discover value.
Covid-19 is a true game-changer that presents active investment managers with a challenge, as well as the opportunity, to discover the varying effects and position portfolios accordingly.
More than ever independent research will drive consistent investment returns.
Kirk Moore is global head of research at Columbia Threadneedle Investments
