These 6 investor trends will define 2021… and beyond
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There is no going back to that ‘2019 normal’ once the vaccines do their work — COVID has indelibly altered or accelerated crucial business and investor trends.
“Indeed, just as the terms ‘prewar’ and ‘postwar’ are commonly used to describe the 20th century, generations to come will likely discuss the pre-COVID-19 and post-COVID-19 eras,” McKinsey leaders Kevin Sneader and Shubham Singal say.
Here’s some investor trends to keep an eye on as we prepare for ‘the next normal’.
In previous downturns the strong companies came out stronger, and the weak got weaker, went under, or were bought.
“Top performers won’t sit on their strengths; instead, as in previous downturns, they will seek out ways to build them—for example, through M&A,” Sneader and Singal say.
“That’s why we expect to see substantial portfolio adjustment as companies with healthy balance sheets seek opportunities in a context of discounted assets and lower valuations.”
Globally, private equity (PE) firms are also sitting on almost $US1.5 trillion of “dry powder” — unallocated capital that’s ready to be invested.
“The PE industry has a reputation of zigging when others are zagging, making deals in difficult times,” Sneader and Singal say.
“And it has history on its side: returns on PE investments made during global downturns tend to be higher than in the good times.
“Put it all together, and we don’t think the PE industry is going to keep its powder dry for much longer; there are simply going to be too many new investment opportunities.”
There were substantial government stimulus programs to cope with the 2008–09 financial crisis, but few of them incorporated climate or environmental action.
This time, addressing climate change though green technology (like electric vehicles) is central to recovery efforts, Sneader and Singal say.
“BlackRock, a global investment company with around $US7 trillion in assets under management, noted in its 2021 Global Outlook that, ‘contrary to past consensus’ it expects that the shift to sustainability will ‘help enhance returns’ and that ‘the tectonic shift towards sustainable investing is accelerating’,” Sneader and Singal say.
“Just as digital-economy companies have powered stock-market returns in the past couple of decades, so green-technology companies could play that role in the coming decades.”
As consumer confidence returns, so will spending as pent-up demand is unleashed.
“That has been the experience of all previous economic downturns,” Sneader and Singal say.
“One difference, however, is that services have been particularly hard hit this time.
“The bounce back will therefore likely emphasise those businesses, particularly the ones that have a communal element, such as restaurants and entertainment venues.”
People who travel for pleasure will want to get back to doing so ASAP. Business travel not so much, which is problem for hotels and airlines.
In 2018, business-travel spending reached $US1.4 trillion — more than 20 per cent of the total spending in the hospitality and travel sector.
It also brings in a disproportionate share of profits.
70 percent of revenues globally for high-end hotels, for example.
“During and after the pandemic, though, there is a question about business travel: Exactly when is it necessary?” Sneader and Singal say.
“The answer is almost certain to be not as much as before.”
When a single country or even a single factory went dark, the lack of critical components shut down production.
“That’s one reason why agencies such as the US Department of Defence are diversifying their networks of suppliers for essentials, such as in healthcare manufacturing and microelectronics,” Sneader and Singal say.
“None of those things means that multinationals are going to ship all or most of their production back to their home markets.
“There are good reasons to take advantage of regional expertise and to be in place to serve fast-growing consumer markets.
“But questions on security and resiliency mean that those companies are likely to be more thoughtful about the business cases for such decisions.”
This could be the launching point for a massive acceleration in the pace of medical innovation, with biology meeting tech in new ways.
“Not only was the COVID-19 genome sequenced in a matter of weeks, rather than months, but the vaccine rolled out in less than a year — an astonishing accomplishment given that normal vaccine development has often taken a decade,” Sneader and Singal say.
“Urgency has created momentum, but the larger story is how a wide and diverse range of capabilities — among them, bioengineering, genetic sequencing, computing, data analytics, automation, machine learning, and AI — have come together.”