Forecasting a Post-Pandemic Future
Those who have knowledge, don't predict. Those who predict, don't have knowledge.
— Lao Tzu
Trying to predict what will happen to the economy and its impact on our investments is notoriously difficult. Sometimes, there are implications that you may think are blatantly obvious but they may end up affecting the prices of assets very differently.
How many times have you seen positive reports issued by a company only for the share price to decline when the market opens? A more interesting statistic for 2020 is the number of money-losing companies (measured by negative net income for the past 12 months) which are registering mind-blowing returns. SEA Ltd (parent company of Shopee and video game developer Garena) is up over +300% this year despite reporting -US$1Bn in negative income over the past year. Nikola, an upstart electric car maker with -US$85M in losses is up +130% and Spotify with -US$300M in losses is up +70% this year, and the list goes on:
How does one make sense of such numbers? 2020 has shown investors yet again that markets cannot be predicted. You can argue you could’ve forecasted the March sell-off, but nobody would have known that markets would recover all their losses within a few months. The strength of the rally in the face of economic shutdowns around the world was unprecedented. Taken as a whole, it’s a reminder that the prediction game can be a losing one for investors. Imagine that you had fled to safety in the early part of the year - it would be likely that you’d still waiting for a good time to come back into the market.
However, the pandemic has accelerated some trends that were already in place, and that will cause implications that will become undeniably clear and meaningful over time. For example, working from home has become the de facto modus operandi for many firms. Improvements in office technology and productivity suites allow workforces to untether themselves and work on a timetable of their choosing. Many have found these arrangements to be highly efficient, with very little workflow being affected. This should significantly reduce demand for office space both in the near and long term, redefining urban planning and perhaps impacting those commercial REITs that you currently hold for dividends.
COVID-19 has also brought travel to a halt. Some countries are currently in the midst of negotiating travel bubbles for essential and business purposes in a bid to revive some portion of their economies. In the past, business travellers have been the most profitable segment for airlines and hotels. However, with the rise and efficiency of video conferencing and virtual collaboration tools, it is likely that a chunk of business travel, and their resultant profit, could disappear altogether. The response of hotels and the airline industry and the adjustments they make to their business models in order to cater to more leisure-related travel will define whether they survive or disappear altogether.
As for Retail and F&B, COVID-19 has forced many to ramp up their e-stores and online offerings. Delivery and online shopping had already been on an upward trend before the pandemic, exploding in popularity as consumers who worried about face-to-face interactions were forced to make their transactions online. Restaurants and retailers who were slow to adapt have seen revenues drop off a cliff, with many shutting down prematurely. Could this mean a rise in shared central kitchens and large logistical Amazon-type warehouses where shipments are processed? With increased internet traffic, off-site and cloud server usage, infrastructure and data centers could be on the ascendant.
At the end of the day, we don’t know whether these outcomes would translate to actionable investing strategies or decisions. Despite ‘logical’ deduction methods and events in the news seemingly backing your theories, history has shown there’s no compelling or dependable way to forecast stock and bond movements. A wiser strategy is to hold a range of investments that focus on systematic and robust drivers of potential returns. Investors who were broadly diversified around the globe and across asset classes are in a position to potentially enjoy the returns that the markets have delivered thus far. Last year, this year, next year — this approach remains timeless.
