Difficulty: Easy
1) China’s experience: Retail lags industrial recovery after easing lockdown
2) Economies dependent on tourism/ accomm/ F&B/ recreation are more vulnerable
3) The InvestQuest looks at stock valuations in the context of how long the industry may take to recover
Lockdowns across the world are easing
Lockdown easing in my home country… On 2nd May (Saturday), the Singapore government announced plans to gradually ease Covid-19 circuit breaker measures given a notable decline in community virus spread, allowing for a reopening of hairdressing services, laundry services and selected food retail outlets on 12th May. Unfortunately for bubble tea lovers, bubble tea shops have been excluded from that list.
As well as other countries… As a number of countries have passed what they view as their Covid-19 peaks, similar easing plans have been announced. In a report published on 1st May, HSBC outlines a useful summary of such plans by country.
UK will be announcing this week. Missing from the above list below is hard-hit UK. The UK government will be publishing what Boris Johnson called a “comprehensive plan” this week. The plan will set out how the UK can continue to suppress the disease and at the same time restart the economy.
What is the economy likely to look like post lockdown easing?
Post easing, retail activity lags industrial recovery. While the stock market has rebounded from March troughs on optimism of potential resumption of business activities, HSBC has cautioned that in China’s experience, consumer retail activity has still lagged the restarts of industrial activity (see chart below) after lockdowns were eased.
Businesses likely to be more adversely impacted (highlighted in red in the table below) are those that offer services/products that:
- Attract large crowds
- Are easily delayed or replicated from home
This is as any lockdown easing for these activities will only come at a much later stage.
This can be further substantiated by a recent survey published by McKinsey & Co (image below), as a read on anticipated consumer spending across different spending categories.
Net intent is calculated by subtracting the percent of respondents stating they expect to decrease spending from the percent of respondents stating they expect to increase spending.
Source: McKinsey & Company COVID-19 Consumer Pulse surveys, conducted globally between March 15 and April 19 2020 (as quoted in HSBC report)
Countries will be affected to varying degrees, depending on their economic structure
Economies reliant on tourism. For countries that are largely driven by tourism like Philippines, Thailand, Greece, their recovery could be particularly slow.
Economies reliant on accommodation, F&B, and recreation sectors. In the same vein as the above, countries such as Spain, Japan, and Thailand have a larger share of output generated by these sectors sectors, which could also result in slower recoveries.
So how should we think about investing in the time of Covid, given these insights?
The InvestQuest’s View: The bulk of the market appears to be moving in tandem (aside from tech/healthcare/consumer staples). As such, it’s important to categorize which are the businesses whose operations will recover soonish (let’s say 2 years) and those that will take longer.
This is how I categorize industries in the time of Covid:
- Doing great/steady — Tech, Grocers, Biopharma, Home entertainment
- “Temporarily” hit (2 to 5 years) — Restaurants, Banks, Hotels
- Semi-permanently altered — Airlines, Commercial Real Estate, Serviced Apartments
That’s not to say that “temporarily” hit or semi-permanently altered industries are not great investment opportunities. It’s all about the valuation you can buy it at! If you had bought Singapore banks during the GFC, you would have made a lot of money! But yes, for industries with greater headwinds, one should demand a lower valuation (relative to historical).
For better or worse, we can expect long-lasting changes in human behaviour as a result of the current global health crisis. A resurgence of single use plastics. Groceries / e-commerce / home entertainment gaining a larger share of the consumer wallet. Business transformation to facilitate the adoption of flexible working arrangements and digital platforms. There are just a few examples that come to mind. Companies and business models that are able to adapt quickly will thrive, offering opportunities for the discerning investor.
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