The COVID pandemic, and more than a year of preventative lockdowns, have transformed the way we interact. As the world gets vaccinated and moves closer to normalcy again, investors should take note of these 5 trends, which took off during the pandemic and are likely to continue.
An accelerated technological revolution
Technological innovation is a quintessential part of the economy as it becomes further integrated in our everyday lives. The expression “necessity is the mother of invention” was evident throughout the duration of the lockdowns, as businesses rose to the challenge of maximizing existing technologies to not only survive, but thrive. Due to the reality of the virus’s impact, the pandemic made believers out of significant portions of the population that were either skeptical or unaware of how beneficial technology can be. As a result, years’ worth of technological revolution was packed into a few months.
One example: the Disney+ streaming service garnered around 100 million subscribers in less than a year, which is more than Disney had planned to serve by 2024. The effectiveness of this greater dependence on technology has been well-timed for the development of 5G, which will upgrade both speed and capacity. While only 4% of North American consumers have 5G access today, 80% are expected to by 2026, according to data from Ericsson. We believe the rollout of 5G will serve as a catalyst for better earnings and upside price potential for two of our favorite sectors, Information Technology and Communication Services.
Delivering the digital economy
In an effort to avoid crowded stores, consumers shifted their purchases to online retailers. E-commerce had seen a solid upward trajectory prior to the outbreak, but the growing user base magnified the trend. In fact, online spending is rising at a pace of 20% year-over-year and now accounts for about 14% of total retail sales versus 8% just five years ago. Whether it be for convenience, selection, or competitive pricing, consumers are unlikely to abandon online purchases even after the sustainable reopening.
In our recent Investment Strategy Sentiment Survey, 80% of respondents indicated they will spend more online this year than last year — a substantial figure given the number of customers who counted on home delivery in 2020. Incidentally, with record savings and disposable income, e-commerce spending should remain alive and well.
Healthcare as the unsung hero
The initial onset of the COVID-19 crisis alone highlighted the importance of a well-functioning healthcare system equipped with the ability to combat unexpected health-related crises. We are forever grateful to the healthcare workers who adapted under dire circumstances, but the need for further investment is evident. Whether it be a lack of personal protection equipment (PPE) for healthcare workers, scarce testing equipment or low hospital bed capacity, additional investment would avoid an overtaxed system should a new crisis emerge.
More importantly, the resounding speed at which multiple effective vaccines were developed gives us confidence that the science and methodologies utilized will be replicated to combat other diseases. This is especially true given that the first ever mRNA vaccine (Pfizer and Moderna) was highly effective in eliciting an immune response. Aging demographics were already expected to increase healthcare spending, but the crisis accelerated other thematic trends, particularly for telehealth and robotic surgeries.
Despite healthcare advancements leading us out of the pandemic, the sector has not been rewarded by investors as it has underperformed the broader market and trades at the least expensive levels relative to the S&P 500 on record. Given its visibility in future earnings and the fact it is one of only two sectors (the other being Information Technology) to record positive earnings through the pandemic, we view this unsung hero favorably.
The Financial Services Institute blasts the move and won't rule out legal action to reinstate the more favorable Trump-era regulation.
Paying the piper
Unprecedented fiscal spending, about $5.5 trillion, helped the economy avoid the worst-case scenario and built a bridge to more normal times, but it will likely come at a cost. To pay for both the rescue and recovery packages, Democrats are pursuing a path to reverse portions of the 2017 tax cuts. For individuals, tax rates may be raised to 39.6% for top income earners, and the estate tax exemption threshold may be decreased to as low as $3.5 million in addition to stepped-up basis being removed. Higher capital gains taxes for the highest earning households are a strong consideration. On the corporate side, the tax rate may be increased from 21% to 28%.
The biggest question remains when these tax policy shifts may occur, and our Washington Policy Analyst Ed Mills believes that most major increases will be a 2022 story, with next year’s midterm elections serving as a limiting factor in the near term. However, if enactment occurs before the economy fully heals, it may serve as a headwind for both the recovery and equity market.
Steadfast interest in sustainable investing
The prolonged global lockdowns highlighted the impact of reduced carbon emissions on the environment even over a relatively short time period, and the virus revealed which companies succeeded or failed to provide employees with adequate testing, sick leave or PPE in the midst of a global health crisis. These revelations encouraged politicians, regulators and some of the largest companies in the S&P 500 to be proactive. Whether it be General Motors planning to eliminate gasoline and diesel light-duty cars and SUVs by 2035 or Microsoft converting campus space into vaccine centers, there has been a significant response to the growing investor interest in ESG principles.
This interest in sustainable investing is prevalent in both the equity and fixed income markets. In fact, over the past 15 years, equity assets managed with identifiable ESG considerations have increased nearly tenfold, and ESG-related bonds are expected to account for one-eighth of total bond issuance this year. But as ESG interest grows, accountability will become key. Whether it be transparency and consistency in ESG score calculations or surveillance as to whether companies are adhering to their ESG-related commitments, increased scrutiny will likely be prevalent.
While we hope the pandemic will soon be in the rearview mirror, it has initiated a platform to make transformative changes to our economy, healthcare system and everyday lives. As we look forward to a sustainable reopening, social distancing and masks will eventually be left behind, but investors should take note of some of the positive, innovative developments that will last well beyond the darkest days of the pandemic.
