A silver lining to the dark clouds
Bill Jamieson saw at first-hand how the pandemic changed behaviour, and believes the lessons learned over the past three months will quickly feed through to the ‘real’ economy
Amid the economic carnage of the coronavirus pandemic, where is a refuge to be found? There are some winners if investors choose carefully, but the damage being wrought across the world on global supply chains and manufacturing is immense and may take longer to repair than forecasts of a ‘V’ shaped recovery suggest.
Yet amid all this there is opportunity for domestic suppliers of goods and services, from industrial components to agriculture, and from pharmaceutical products to digital suppliers.
Never underestimate the capacity of this crisis to spur innovation, adaptation and enterprise. I am presently living in a little village, comprised of self-isolating elderly people, until now unfamiliar with the ways of the internet and social media. Yet the onset of the pandemic and constant warnings to stay indoors have brought a surge in internet use and mastery of the intricacies of Facebook, Instagram, text messaging and the wonders of Zoom – an app that enables video conferencing and chats with relatives and neighbours.
The village has been well served by fleets of enterprising mobile food vans bringing vegetables, fresh fish, meat pies and dairy products twice a week. As my house is near the village car park where the vans congregate, I have been acting as village point man, alerting folk to their arrival by email and text message. Within minutes queues observing social distancing stretch along the main street, with news and gossip exchanged at a rate Reuters could only envy. There’s isolation, but that’s not to be confused with lack of communication. The village is buzzing.
Examples abound of how we are responding to this national lockdown in creative and enterprising ways. We should keep these in mind as the evidence of global economic damage mounts. The respected Oxford Economics group warns that global industrial production fell by 4.5% in the first quarter before a meagre 0.4% expansion in April-June. It expects industrial production worldwide to decline by 2% in 2020, with manufacturing output (excluding the extractive and utilities sectors) shrinking by 2.8%.
Lockdowns and social distancing measures have been profoundly damaging for the transport sector, in particular aviation. Service activities reliant on ‘social consumption’ such as tourism and hospitality – Scotland’s biggest industry – are being devastated.
The disruption is also spreading to manufacturing, with weak demand, supply-chain bottlenecks and coronavirus containment measures prompting the car industry’s most extensive factory shutdowns since World War II. The Oxford analysis warns that the outcome could be a severe global industrial recession, with production falling 3% this year.
The longer that the lockdown persists, the greater the damage and the longer it will take businesses to recover. When recovery does come, it could well see a preference for domestic sourcing as companies replenish stocks and shield themselves from a recurrence. This is likely to be marked in the agricultural and farming sectors. We have also learnt how critical the self-employed and small and mediumsized enterprise (SME) sectors are to the health and well-being of the economy, so official policy is likely to see long-term supportive change for the better.
Meanwhile, what of the companies and businesses
Self-isolating elderly people started using the internet and Apps
that might benefit from everybody working from home? At the height of the lockdown 250 million Europeans and Americans were confined to quarters, with companies scrambling to enable home working. Josh SambrookSmith, investment analyst at Sarasin & Partners, says companies providing remote working and collaboration software, such as Citrix, Microsoft and Zoom, ‘are notably benefitting from this increase in IT spend’.
Chris Elliott, co-manager of the £595 million Evenlode Global Income fund, also highlighted Microsoft as a company not only benefiting from more people working at home, but one which will also continue to benefit when people return to their offices.
‘These users will rapidly adapt to the systems out of necessity,’ Elliott says. ‘For a company like Microsoft, this spike in usage of cloud-based products will be followed by a longer-term increase, even when we all return to work.’
He says the laptop aisles of Best Buy stores in the US ‘have begun to resemble the toilet paper shelves in Tesco’. Many of those laptops run on Intel components.
All of this, he argues, will be carried over from the pandemic into a long-term change in how companies operate. ‘On the world’s eventual return to the workplace, many businesses will retain the more flexible cloud environments that they adopted in a time of crisis.’
Another cloud infrastructure provider which could benefit is SysGroup. Demand comes not just from the migration to working from home, but the long-term trend of digital transformation across all businesses in the coming years.
Japanese gaming company Nintendo is another beneficiary of people moving indoors. A remarkable 34 out of the 50 top-selling video games of all-time (and 16 out of the top 25) belong to the firm. Products such as Nintendo Switch – which has been sold out across multiple UK retailers for weeks – are central to this with its multi-player design hosting classic games such as Pokémon and Animal Crossing.
There are few households that have not resorted to online retail giant Amazon in recent weeks, whether for footwear and clothing or essential household supplies. It took on hundreds of extra staff to cope with the deluge of orders.
Finally, there is Zoom Video Communications, the Californian company that has developed video conferencing software. Founded in 2011 and floated on NASDAQ, its software is used across various industries from universities to hospitals to private employers like Uber, while household and family use has now exploded in the lockdown era.
Shares in Zoom soared by more than 80% on its public debut, with the shares closing at $62 compared with the price of $36 set ahead of the opening. Zoom ended its first day with a market valuation of about $16 billion. In recent weeks, shares in the group, which now employs more than 2,500, have been changing hands for between £145 and $155 apiece.
Cloud computing and digital connectivity are now experiencing a quantum leap in activity and innovation, with changes that will reshape the world of work as we emerge from the global lockdown. And despite the sharp deterioration in the near-term outlook, the consensus expectation is still for a strong recovery towards the end of this year and into 2021 as lockdowns end, consumer and business spending resumes – and those massive policy stimulus measures take effect.
For all that we think we are coping with office requirements on our laptops at home, work is a social activity and interaction vital for enterprise. That recovery cannot come soon enough.
Many businesses will retain the flexibility they adopted in time of crisis