He who rejects change is the architect of decay. The only human institution which rejects progress is the cemetery. − Harold Wilson
Things always change, and after the virus is contained, the change is likely to be dramatic and incredible. Our nation is likely to be high on debt, protectionism, and digitization. Americans have witnessed the virus-related economic destruction and many have experienced health- or wealth-related suffering. The impact will leave most Americans scarred and change the way they work, think, interact, and transact.
Despite the economic slump, markets are expected to be buoyant because the Fed has pledged to keep interest rates near zero until 2023. During low-interest-rate times, most investors tend to chase risk assets – whereas the really big ones get clued on to future trends promptly, thus always remaining one step ahead of the rest. As much as 50% of all stocks and mutual funds are owned by the top 1% of wealthy Americans. It’s time we small investors get under their skin and figure out emerging trends as quickly as they can.
Image Source: Twitter
Here, in my opinion, are the long-term secular trends that will emerge going forward:
1. Portfolio Diversification
Investors are busy chasing risk assets without giving a second thought to what could happen if the market crashes all of a sudden. They can consider investing ETF-style for the long term (no short-term bets unless you are a trader), which requires allocating a small percentage of your capital to a large bunch of stocks. For example, you can consider allocating 2.5% of your capital per stock across 20–25 high-quality stocks in the U.S. and international markets.
Secondly, you cannot be chasing only risk assets. Markets are riding high but are very vulnerable to geopolitical events. Therefore, you can consider parking a part of your funds in income ETFs that invest in high-quality corporate bonds and preferred stocks. You also can consider holding 10–15% of your capital in cash to take advantage of volatility.
As per the World Economic Forum, global trade had already peaked out in 2018. COVID-19 is estimated to dent it anywhere between 13% and 32%. In the middle of all this economic mayhem, cries of protectionism and nationalism are getting shriller by the day. Such measures may be counterproductive in the long run but will help local industries in the short run. Savvy short- and medium-term investors can consider picking up companies that are likely to benefit from such moves.
Image Source: WEF
Sectors that are likely to benefit or lose out because of protectionism: Domestic manufacturing and pharmaceutical companies will rake it in. Companies that rely on imports will lose because duties will most likely be hiked. Exporters will lose out because nations will increase tariffs. Of course, the American consumer will lose, but then he is not listed on the stock exchange.
3. Natural, Healthy, and Trusted Foods
A drop in disposable incomes and the virus’s health impact are likely to combine to motivate consumers to buy trusted brands, organic and fresh foods, and to some extent, vegan foods. Consumers may start avoiding processed foods and unhealthy snacks.
WFH, increased risk of hacking, business continuity, increasing productivity, online transacting, automated business processes, and data security are some of the key considerations why companies and nations will opt for digitization in the post-COVID-19 era.
Software, data privacy, cloud infrastructure, cybersecurity, video conferencing, e-commerce, online socialization, gaming, online streaming, semiconductors, telecommunications, and digital payments companies have already benefitted, and are set to benefit much more after the virus is contained.
Examples of companies that will benefit: You already know about Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Salesforce (NYSE:CRM), and Amazon (NASDAQ:AMZN). Here are a few more: Cloudflare (NET), NortonLifeLock (NLOK), Juniper Networks (JNPR), and Intel (INTC).
Green energy and solutions are environment-friendly and recover their investments over the long run. COVID-19 (pandemic-related) and environmental risks to the economy and environment are now being increasingly considered as extremely serious, especially by the younger generation. Awareness about sustainable solutions is increasing by the day.
Image Source: JP Morgan
Europe is currently leading the move towards a green recovery. The goal is to shift to a net-zero greenhouse-gas emissions environment. Any investment in green energy recovers its costs over the long run, motivates entrepreneurs, and generates employment. It’s a win-win situation for nations wanting to recover from the pandemic’s economic blows.
Sectors that can benefit: Water, Transportation (EVs), energy generation and storage, waste recycling, sustainable environment, agriculture, and food.
Nations now want to be self-reliant and automation can help in achieving this goal. COVID-19 has dramatically boosted the enterprise use of Robotic Process Automation (RBA) across the manufacturing and service sectors. Automation enables a variety of activities such as WFH, e-commerce, security, supply chain, industrial processes, and business processes. The demand has just started rising and is all set to grow exponentially because it helps businesses become resilient.
Some companies that are enabling automation that increases productivity: AeroVironment (AVAV) – unmanned aircraft systems; Cognex Corporation (CGNX) – machine-vision technologies; Rockwell Automation (ROK) – industrial automation.
Whatever had to be said is said above. There isn’t anything much to sum up, except that change is coming and we need to embrace it. We also need to stay up-to-speed with the wealthy 1% who own as much as 50% of stocks.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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