A new report out by investment banking giant Goldman Sachs (NYSE:GS) suggests investing will be changed forever by Covid-19.
“Some events like oil shocks have clear and well-defined implications. Other events change the rules and force a rethink of everything,” say the writers Steve Strongin and Deborah Mirabal.
“Covid-19 is the type of event that resets the entire economy. For investors and companies this is an existential event where capital needs to find new homes and where yesterday’s strategies will only work by accident.”
Investing will go through three main phases, Goldman writes.
- Now: Preservation
Uncertainty is high: focus on funding and balance sheet repair
- Next: Consolidation
Companies whose business models perform well post-Covid pull away from the rest
- Future: Innovation
Potential for massive disruption and superior investment returns, which will attract significant capital.
“From an investing standpoint, the key to navigating:these phases will be to distinguish between competitive advantages that are sustainable and those that are a matter of circumstance,” says the report.
Three main changes to the investing landscape are likely after the pandemic.
More healthcare regulations
The rapid rise of Covid-19 test stocks is a bubble, of that there is no doubt. We are still years away from a vaccine — no matter what the most optimistic bulletin board ramper insists. But health authorities have been forced to loosen normally stringent regulations to allow emergency use tests for Covid-19 and Covid-19 antibody tests.
The report suggests hospitals in the US are likely to see rules that resemble utilities with requirements for excess capacity and regulated returns.
The expansion of healthcare regulations is likely, too. Consolidation into larger firms is the most credible outcome “as regulation almost always has a significant fixed cost.”
Outcome: More biotech takeovers and buyouts of smaller innovators, leading toa better testing ground for biotechs, more use of new medicines like CBD and faster acceptance for human trials.
Fundamental shift in consumer digital tech
The days of hoovering up customers, job adverts for ‘Growth Hackers’, and companies with multi-billion dollar valuations years before profitability may be over, Goldman says.
From Doordash to SnapChat, WeWork to Uber, investors have become used to seeing new tech companies employing a range of sneaky practices to achieve growth at all costs. They range from undercutting the competition on price, stiffing frontline workers and denying employment regulations, all for the sake of taking the largest market share possible in the shortest amount of time. Once market share is filched from the competition, then a company looks to profitability.
For Uber the drive to increase its size at all costs went as far as allegations of board-level sponsored bribery, hacking, theft of intellectual property and industrial espionage, settling a case with Google’s self-driving car division Waymo for $245m in 2017.
“The reality is that people have learned to do things en-mass to a level thought impossible pre-Covid. Transitions that may have taken decades may now only take years,” says Goldman.
“You no longer have to teach customers how to use tele-medicine — it just has to work better than the office. Companies pursued the customer base easiest to capture even if the value created and the ability for the company to monetise that value was limited.
“Now with many user bases having made the transition, it makes sense to pursue the user base where firms ability to create and capture value is highest.”
Outcome: The end of market share growth at all costs. The best companies of the future will demonstrate how their product works better than the competition and provides profitability first, before taking market share.
Resilience and risk
Companies will now base purchasing decisions on new risk preferences. Those companies to survive will likely use less debt raising and have more restrained balance sheets.
We are likely to see highly risk averse heaviours medically vulnerable individuals and legally vulnerable companies, for example, in the insurance or travel and tourism industries.
“Companies have been forced to understand what actually is core to their business, which is a much shorter list than they thought pre-Covid.”
Outcome: A wholesale change in supply chains and mass disruption to contract purchasing.