Investing for a New World

If it hasn’t hit you yet, it will. The fallout from the coronavirus is a watershed moment for people and businesses all around the world. Unlike the 2008 Financial Crisis, the 2020 COVID-19 Recession has created clear winners and losers for both short-term and long-term investors to consider.

In general, we believe the virus and the current situation (e.g. social distancing, quarantine, etc.) is simply accelerating trends that were already happening. Industries that were already forecasted to slow over the next decade, such as brick and mortar retail and traditional fossil fuel energy production, are now being completely washed out. There will be survivors, but consolidation is inevitable. Even globalization overall was hypothesized by some to have peaked when the U.S.-China Trade War was in full swing. Now it’s hard to see global companies relying as heavily as they once did on a supply chain halfway around the world from their main customers.

While it is still far too early to be overly optimistic, prices have come down meaningfully across the board. We are spending extra time on the following themes that could be a meaningful part of the new normal.

HEALTH CARE TECHNOLOGY

In 2019, healthcare technology experienced a record-breaking year in terms of mergers and acquisitions and deal size. An intriguing signal was that a significant amount of investment came from nontraditional sources. Global players such as Amazon, 3M and Google made meaningful investments in 2019, while annual venture capital fund investments more than doubled in less than 5 years.

Post-virus we expect lawmakers to address health care reform once again but perhaps with a new perspective. Healthcare technology has played a crucial role thus far in reducing the stress on the broader health care system. Everything from telemedicine to wearable health technology had already proved it had a place in the current ecosystem. This experience may have fast tracked the shift in consumer preferences toward not physically seeing a doctor for everything, while loosening government regulatory hurdles (e.g. Medicare reimbursement) for faster adoption.

MANUFACTURING AUTOMATION

Even before the novel coronavirus disrupted global supply chains, real discussions were being had about diversifying manufacturing operations to hedge against political and geographic risk. The U.S. — China Trade War gave CEOs something to consider when drawing up their long-term strategic plans as tariffs and other periodic disruptions were beginning to outweigh the benefits of cheap labor.

Companies will continue to maintain manufacturing and supply chains globally. However, we think it is reasonable to expect that businesses will want a greater proportion to “come back home”, wherever home may be. The problem is that costs, particularly human labor, make this wish somewhat prohibitive. The other issue is the lack of resources. According to Axios, U.S. manufacturers reported more than 500,000 unfilled jobs, due in large part to a gap in skillsets. The future of supply chain infrastructure and manufacturing likely incorporate a mix of humans, automation and robotics to fill the gap and reduce costs over the long run.

GLOBAL INFRASTRUCTURE

Infrastructure is one of those things that everyone agrees on but never gets done the way people hope. The fact of the matter is that infrastructure is expensive, and the benefits are not immediate. Often, more pressing issues that need capital are moved ahead despite the obvious benefits that well thought out infrastructure projects can bring to a community, country and society.

The response to the current situation from the federal government in terms of fiscal stimulus has been impressive, but more will be needed. Some of the projected unemployment numbers dwarf what we experienced during the financial crisis and rival those not seen since the Great Depression. If the consumer is unable to contribute its fair share to economic growth, the government will need to step in. Like the response following the Great Depression, a federal infrastructure plan could garner bipartisan support and get people back to work sooner. As we were finishing up this commentary, news broke that the President was calling for a $2 trillion infrastructure bill. We expect other countries will develop their own infrastructure plans as well.

WORK FROM ANYWHERE

Working from home was already the norm for most tech employees in San Francisco. In fact, it wasn’t uncommon to hear that people would go into work either just for the social aspect of being around others or for the infamous free catered lunches. Aside from the technology industry, the flexibility to occasionally work from home was already beginning to pop up in other industries to help attract younger talent. A recently published report by the Becker Friedman Institute at University of Chicago suggested that 34% of all jobs could plausibly be performed from home.

The implications of accelerating this shift are massive. This forced “work from home” experiment will likely change how businesses, and employees, view working from home forever. Back office automation software services, digital communication platforms and paperless operational solutions are essential for employees who need to work from home. We expect other non-tech businesses to follow suit, which will create interesting investment opportunities for long-term investors.

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Disclaimer

The information in this report was prepared by Fire Capital Management. Any views, ideas or forecasts expressed in this report are solely the opinion of Fire Capital Management, unless specifically stated otherwise. The information, data, and statements of fact as of the date of this report are for general purposes only and are believed to be accurate from reliable sources, but no representation or guarantee is made as to their completeness or accuracy. Market conditions can change very quickly. Fire Capital Management reserves the right to alter opinions and/or forecasts as of the date of this report without notice.

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