The financial impact of COVID-19 has been swift, triggering the worst economic contraction since the Great Depression. Global stock market moves have been equally dramatic, with the quickest bear market collapse in history followed by an equally sharp retracement. The losers have been energy, travel, tourism and real estate, while the winners are healthcare and technology.
Looking beyond the short term, we are interested in identifying long-term trends that the COVID-19 crisis has reinforced and accelerated. There are four such trends that are now commonly discussed in the financial press: e-commerce, cashless payments, working from home and healthcare.
These trends are all global in nature. Through depositary receipts listed on Chi-X Australia, known as TraCRs (Transferable Custody Receipts), these trends and US stocks are available to Australian investors. Trading is in Australian dollars, during Australian trading hours, cleared and settled in the usual CHESS system, just like any other Australian share.
It is through the lens of TraCRs that we have been thinking about COVID-19 and its effect on the stock market. There are now 35 TraCRs ranging from A (Apple, Amazon) to Z (Zoom Communications). Together, these 35 depositary receipts represent about 42% of the market capitalisation of the S&P500 Index or 58% of the Nasdaq 100 Index.
1. E-commerce
COVID-19 has delivered a very public effect on shopping. It was evident early with ‘runs’ on toilet paper, the closure of non-essential shops and a dramatic shift to online retail. Amazon (CXA:TCXAMZ) reach its highest ever stock price in both USD and AUD terms. In our view, Amazon's e-commerce business has material upside, though not without competition or challenges.
There are two facts that summarise the long-term opportunity.
First, e-commerce only represents about 15% of adjusted retail sales in the US. COVID-19 has accelerated the take-up of online retail with experts now predicting e-commerce will be a significantly higher percentage of retail sales in five to ten years’ time.
Second, North America accounts for over 70% of Amazon sales, excluding Amazon Web Services (AWS). Hence Amazon’s global expansion to India, Brazil, and even Australia will add further earnings upside.
Amazon is not the only e-commerce giant. Traditional bricks and mortar retailers are moving into the e-commerce space, including Costco (CXA:TCXCOS) and Walmart (CXA:TCXWMT). Walmart’s expansion into online shopping started in 2016 with the acquisition of Jet.com, and it has since acquired at least seven other e-commerce sites. COVID-19 has driven e-commerce sales for Walmart up 74% during the past quarter. This will be consolidated with the recent announcement that Walmart Marketplace will partner with Shopify (a platform that is used by more than one million businesses) to target third-party sales.
We have also rapid growth in many direct-to-consumer websites, including those launched by food and beverage heavyweight PepsiCo (CXA:TCXPEP) with snacks.com and pantryshop.com.
2. Cashless payments
Of the four long-term global trends discussed here, it is perhaps easiest to identify with cashless payments. I am reminded of a three-day trip to Denmark in 2005 where I did not use cash once. That meant payment for food, drink, travel, accommodation and cheap souvenirs all using either Visa (CXA:TCXVIS) or MasterCard (CXA:TCXMAC). Of course, since 2005 the ‘war on cash’ hasn’t just continued, it has accelerated. During Covid-19 many retail shops and cafes are only accepting card payments, something we expect to continue well into the future.
We only need look to China where this has already occurred. However, if you take a global view, the cashless payments trend still has a lot of room left to run. The best way to take advantage of a global trend is with global payment providers such as Visa, MasterCard, Paypal and American Express, more so than a local Australian stock such as Afterpay (ASX:APT).
3. Working from home
Overall, working from home has been remarkably successful with little or no reduction in productivity. A major reason has to be the widespread adoption of video-conferencing technology, epitomised by Zoom Communications (CXA:TCXZOM). The company name has now become a verb, which is promising when you think of previous examples like Google (CXA:TCXGOG), Uber, Xerox or Hoover. Many of us now have accounts with Zoom, Microsoft Teams (CXA:TCXMSF) and Webex, despite never having used any of these services prior to March this year. As a business, the results for Zoom have been spectacular, with a number of industry analysts claiming the last quarter results to be the largest 'beat' versus expectations in over 20 years. Will video-conferencing and working from home prove to be fleeting trends? It’s difficult to say, but more flexible work arrangements, reduced office space and significantly less business travel provide the ideal environment for businesses to continue to host Zoom meetings.
Have you ever wondered which company powers Zoom? As well as Netflix (CXA:TCXNFL), Fortnite, Slack and many other work-from-home or stay-at-home applications? It is the aforementioned AWS. The cloud computing businesses of Amazon, Microsoft and Google have seen tremendous growth since the start of this year. But they don’t just provide the infrastructure for video streaming, video conferencing, gaming and work productivity tools, they also power the first two trends of e-commerce and cashless payments.
4. Healthcare
Healthcare is a multi-faceted multi-decade global trend that has propelled CSL (ASX:CSL) to become the largest listed company in Australia.
The Australian Institute of Health and Welfare published a report in June 2019 “Australia’s health expenditure: an international comparison” which showed that the percentage of GDP spent on health care in Australia was 7.4% in 2000 but climbed to 9.2% in 2016 and has subsequently increased further. In the US, healthcare expenditure increased from 11.7% in 2000 up to 17.1% in 2016. The scale of the US economy combined with the disproportionate size of healthcare spending explains why the four TraCRs companies from the healthcare sector are all larger than CSL.
Johnson & Johnson (CXA:TCXJNJ) is four times larger than CSL while both Merck (CXA:TCXMRK) and Pfizer (CXA:TCXPFE) are approximately twice as large. The most recent healthcare TraCR added is Gilead Sciences (CXA:TCXGIL), which has a market capitalisation marginally higher than CSL. Gilead is the world’s leading producer of anti-viral drugs providing treatment for HIV, hepatitis B and C as well as influenza. It is for this reason that Gilead has been in the news, with their anti-viral drug remdesivir. While the use of remdesivir to treat the COVID-19 disease has had a degree of controversy, but Gilead has already licensed it to generic drug companies for distribution to over 127 countries.
Finally, the 3M company (CXA:TCXMMM), previously known around the world for Post-it Notes, is now in the news for N95 masks, an essential component of the personal protective equipment (PPE) needed by health care workers. 3M is an industrial conglomerate that operates in over 70 countries, it makes over 60,000 different products across its four business segments of: safety & industrial; transportation and electronics; healthcare and consumer. 3M’s defensive attributes, steady dividend and leverage to the ongoing demand for their healthcare products combined with a need to replenish national stockpiles make it a compelling COVID-19 investment in both the short and long term.
Valuation and concentration
The impact of COVID-19 is likely to be long lasting as economies around the world emerge from a global recession. These long-term trends have further to run. So, what are the risks to investing in stocks that are leveraged to these themes? Valuation and concentration.
With respect to valuation, almost all of the stocks mentioned here have had significant price appreciation since February this year. Only time will tell if all future upside from these trends has been accurately factored into current prices. Don’t put all your eggs in one basket or even in one well-documented trend but better to construction a well-diversified portfolio. No matter how convinced you are of the thesis for any stock or macro trend, it pays to mitigate your risks.
Shane Miller is the Chief Commercial Officer of Cboe Australia, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any person.
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