The future is here – Gerrit Smit

2022 has already arrived for many businesses who flourish under Covid-19

Since the outbreak of the Covid-19 pandemic, countless businesses have suffered huge losses. A great many others, though, have flourished. Food delivery, payment and courier businesses have benefitted, as have retailers selling exercise equipment, cooking utensils or ingredients and, of course, technology and media businesses such as cloud, ecommerce, communication and streaming services.

The real winners are actually not new but well-established businesses, tapping into their potential and taking advantage of new opportunities as they now present themselves. Most of the top ten holdings in our Stonehage Fleming Global Best Ideas strategy are excellent examples. None of them is a new investment but, through holding them for some time, their excellent performance and further investment, they have moved into the top ten.

PayPal, Microsoft and Visa, for instance, have all benefitted from current circumstances. Even animal health company, Zoetis has done well, as more people are at home caring for their pets and many more are getting new ones.

Amazon, though, is perhaps the most striking example of structural shifts in the economy. Since the beginning of Covid-19 alone, ecommerce penetration as a percentage of retail sales in the US economy has increased as much as it took a decade to achieve, previously. This must be one of the biggest economic shifts in the world for a long time, if not ever.

For Amazon, Christmas has come in spring. The company has experienced record levels of demand, comparable to a usual thanksgiving or Christmas shopping weekend. Their first quarter sales alone jumped by 26% (Source: Amazon) with thriving sales on both the online retail and the food and grocery side. Video and web services have also flourished during weeks-long lockdowns. While most other businesses have had to furlough their employees, Amazon announced that through the Great Virus Crisis (GVC) they are adding 100,000 people to their staff.

As well they might. All the new business flowing to Amazon and those in similar situations has arrived on their doorstep without the normal advertising and promotional costs. This new business is therefore extremely profitable. Indeed, many such businesses are living not in 2020, or even 2021, but have actually fast-forwarded to 2022 in a matter of weeks.

The digital payments sector is another benefiting hugely from the pandemic. In April, PayPal informed shareholders they had scored a huge 22% increase in transactions across their network. They took on 7.4m new customers in April alone (Source: PayPal) - a 135% increase. Again, these new customers are very profitable as they arrived without the associated costs to lure them and their new business.

Visa, similarly, is benefitting. Quite apart from an increase in online purchases, hygiene-conscious consumers’ reluctance to handle cash has further boosted business. Covid-19 is globally accelerating the structural process of switching from cash to electronic payments.

Many businesses have repositioned their workforce to work from home - in many cases for longer than originally thought. This is benefitting cloud, software and communication businesses to a large degree. Microsoft and Adobe are two of many beneficiaries.

With many businesses already living in the ‘future’, investors will find no shortage of newly-energised investment opportunities. Economic uncertainties and market volatility, however, will remain as we slowly recover from GVC. Unfortunately, many businesses may not survive.

Rather than simply investing in the overall market and hoping for the best, investors should be very selective with their investments – buying only quality businesses with strong balance sheets. Correct stock selection is now more critical than ever before.

Gerrit Smit is Head of Equity Management, Stonehage Fleming Investment Management UK. He manages the Stonehage Fleming Global Best Ideas Equity Fund.

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