Playing the COVID pandemic

Gus Papageorgiou, PI Financial’s research head, says if a vaccine is developed by fall, we should see a robust recovery. If not, and a second wave hits, a recovery may be prolonged.

working_from_home

Working from home is one of the more significant changes we can expect in a post-COVID-19 world.

As we move past the worst of the pandemic (hopefully), the attention of policy makers and business leaders will turn to returning the economy to growth and full employment, continuing to battle the pandemic, and launching global efforts to ensure the catastrophic events and response we experienced are never repeated again. For investors, the attention will turn to positioning portfolios to benefit from an economic recovery.

We are still in the midst of the ramifications from the pandemic and economies are still far from fully open. Many sectors such as entertainment, travel and leisure will likely remain under pressure for some time to come. And although there are many dire warnings that things will never go back to normal, we firmly believe that as a vaccine is eventually discovered things will slowly, but surely, return to normal.

That does not mean we will not see things change. We do believe COVID has left its mark on how people work and live but in the end people will continue to travel, they will continue to go to restaurants and sporting events and indulge in other leisure activities. We are all social creatures and inevitably the human spirit chooses to seek hope and progress over fear and isolation.

Several new trends have developed

Although it is difficult to accurately predict the future, we do see several trends that will likely prevail as a result of COVID. For example, working from home will be more commonplace.

While the technology has existed for years, most professionals still chose to work from the office rather than from home. But working from home will become more commonplace.

COVID showed us that many employees can be just as productive, and in some cases more productive, working from home versus coming into the office. Employees can save two hours a day or more commuting, and employers can reduce their real estate footprint.

Open Text Corp. (TSX—OTEX; NASDAQ—OTEX) is closing half of its offices impacting 15 per cent of its employees who will now work from home. Shopify Inc. (TSX—SHOP; NYSE—SHOP) plans to move to a digital-first model. Lastly, Bank of Montreal (TSX—BMO; NYSE—BMO) may move to allow 80 per cent of its employees to work from home part time, or all of the time.

Working from home proves productive

Beyond Canada, we are seeing major companies such as Twitter Inc. (NYSE—TWTR) and Square Inc. (NYSE—SQ) allowing their employees the option of working from home permanently.

As Shopify CEO Tobi Lütke commented in an interview recently, “2030 just got pulled forward to 2020,” advancing e-commerce 10 years. While physical retail globally was shut down due to social distancing policies, consumers moved on-line at a velocity never seen before. Partially out of necessity but also out of concern for their health.

But this behaviour is unlikely to change anytime soon in our opinion. Industries that were dragging their feet in terms of e-commerce were given a jolt forward. Consumers have changed in this regard and the e-commerce experience needs to catch up.

Supply chains will be less Chinese-centric

From globalization to localization, COVID has made it apparent that an over-reliance on Chinese-centric supply chains, especially for medical supplies, is no longer in anyone’s interests.

As a result, we expect multi-nationals will pull production out of the area as they seek to align themselves with more stable, developed regions. This will make supply chains more complex going forward and may push consumer prices higher.

In an effort to minimize the economic damage from the pandemic, governments around the world pulled all the fiscal and monetary levers they could—printing and spending money at a level not seen since the Second World War.

Although the reaction was justified, there is a price to pay for this kind of policy decision. Here at home, our fiscal picture is relatively healthy with a triple-A debt rating.

Internationally, many countries are not in as good a shape. Debt levels in the US remain high and governments there will likely seek to raise tax revenue. Legalizing cannabis may be an easy policy tool to deploy here.

Healthcare will also be transformed. Telehealth has been discussed for some time now but COVID put it front and centre. In addition, retirement and long-term care facilities saw some of the worst consequences from COVID. As the pandemic subsides, we believe the healthcare industry will see significant change.

Precious metals will remain strong

Precious metals will remain in vogue. Investor sentiment for precious metals-focused equities will remain strong, underpinned by massive US federal and global government interventions (through qualitative easing); a much bigger intervention than what we saw in the 2008 global financial crisis.

We also see increasingly strained US-China tensions over the source of the coronavirus pandemic as providing near-term support for precious metal prices (more gold than silver).

Trying to time the recovery is extremely difficult. If a vaccine is developed in the fall, we should see a quick and robust recovery. However, if a vaccine takes longer to develop and a second wave hits us, a recovery could be prolonged.

Gus Papageorgiou is head of research at PI Financial.

This is an edited version of an article that was originally published for subscribers in the June 19, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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