Morgan Stanley
  • Thoughts on the Market
  • Jul 28, 2020

Investment Themes for a Post-COVID World

Ellen Zentner and Adam Virgadamo

The impact of COVID-19 on consumer behavior and macro trends will likely affect investing fundamentals for years to come. Our experts weigh in on several high-level themes for investors.

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Current Episode Transcript

Ellen Zentner: Hello, and thanks for joining this special edition of Thoughts on the Market. I'm Ellen Zentner, chief U.S. economist for Morgan Stanley.

Adam Virgadamo: And I'm Adam Virgadamo, U.S. equity strategist.

Zentner: And today on the podcast, we'll look beyond the current headlines on COVID-19 and talk a little bit about life after COVID for the economy and markets. It's Tuesday, July 28, at 11 a.m. in New York.

Zentner: Adam, you and I collaborated on a couple of reports that looked at the pace of recovery in the US, and just to catch listeners up to speed, what we found was that the pace of the recovery over the next 18 months really holds the key to the medium term outlook. And I think two big variables for that recovery are timing of a viable vaccine and the willingness of consumers to spend in this environment. So today, I thought it would be interesting to look at some of the work your team has done on identifying major investment themes that could arise from the impact of COVID-19. Do you want to walk us through some of those major takeaways?

Virgadamo: Sure. Thanks, Ellen. So I think to start, we're looking at a medium term horizon. And I think what we're talking about is adjusting to a new normal. A new normal that's going to require new forms of investment, new ways for people to work-- many Americans are, of course, working from home now-- changes to consumer behavior and our spending patterns. And I think these moves in many cases are going to involve doing more with less. These moves focus on investments that enhance productivity. And ultimately, I think these can be longer term positives for the economy as well as the stock market. So the approach we took in trying to put together these themes was to ask our analysts, who cover about a thousand stocks in the US: what are you seeing in the world and life after COVID? And what emerged was about 50 different trends that we could potentially invest on or think about and those grouped into six kind of broader themes. And I'm happy to kind of walk through some of those as we go through the podcast today.

Zentner: Obviously, one of the biggest changes is this shift to working at home. And even after a vaccine is found, you know, our team, the economics team, is estimating that 30% of workers could still be remote in our most likely base case scenario, and that has implications. So, you know, what themes could emerge from these work from home trends?

Virgadamo: Work from home was probably the biggest kind of metatrend we saw that affected many different subsectors. As you said, we're thinking longer term, 30% of the U.S. workforce may be working from home. Pre-COVID, that number was about 15%. Our survey work currently indicates the number is about half of the U.S. working from home. And of those, about half think they could do it indefinitely. In our view, what we've had here is a radical experiment. And it showed that in most cases, this work from home system can actually work, which is why your 30% number is where it is. It means there's a structural shift to working more from home in the future.

Virgadamo: Your team has done a lot of work on spending patterns when people are working more from home. And I mean, to mention a few of the way things change and maybe you can tell us a bit more about some of those. You're probably gonna be spending more money on your home since you're depreciating that asset, you're wearing out the goods in your home a bit more. You're probably spending less money on apparel. You're probably using less public transportation to commute into the home. That has potential implications for budgets for state and local governments that we need to think about. And I guess maybe the last thing I'll mention is just the obvious impact on housing itself. If more people are working from home, I think that means that there is a case to be made for spending more on the home, for looking for bigger homes, homes that accommodate more time in them. Well, we think that's a potential tailwind for single family housing, for suburban housing. And ultimately, being tied to an urban center may matter less. It's one of the reasons our analysts have generally been positive on single family rentals. I guess I'll put it back to you. Your team has done a lot of work on some of these spending patterns and working from home. What else are you seeing there?

Zentner: This was one of the most interesting parts of this analysis, we really shift towards spending patterns that are more like when we're in retirement. And so that's what helped us, you know, look at how spending shares would shift over time. So, you know, things like social distancing means more shopping at home. And so when talking with our equity analyst, I mean, what did you discover about e-commerce investment trends?

Virgadamo: Well, you hit on the second big theme: people are buying more from home. E-commerce has been this runaway freight train of a trend that's been in place for the better part of a decade and a half now. What we've seen is what our analysts call a three year pull forward in demand, meaning we took kind of the average growth rate we've had over the last few years and tripled it in the first half of this year. So we think that maybe not all of that stays as durable e-commerce demand. But just like work from home, more of it than where we were before is probably going to stick. So higher e-commerce penetration to us means that the firms that are best positioned to offer a direct to consumer experience stand to benefit. If you think about retail brands that formerly operated in a wholesale channel, effectively selling through a middleman, well cutting that middlemen out, selling direct to the consumer means better margins on a going forward basis.

Maybe one other area to talk about consumption of goods online is restaurants. You think about an area that's clearly eye of the storm for changes in consumer behavior and willingness to go outside of the home, restaurants would be right there. And we think there's been a clear example that there's been a shift to a digital model. But from an investment perspective, I think there's a real debate as to whether or not that increased digital adoption, potentially increased digital efficiency, accrues ultimately to the benefit of the restaurants or to third party aggregators who are providing these services and acting like a platform for people to order from. So lots of interesting dynamics there.

Zentner: COVID-19 is a big accelerator of a lot of these existing trends. And I have to tell you, during this time, my husband and I leased a vehicle and all of it was handled electronically. So, you know, just wrapping up here on some of the big themes, you know, I want to be sure that we talk about tech a little bit here. We're now relying on tech to help us collaborate and communicate with each other. What you and I are doing right now is a big example of that. So, you know, what are some of the big themes there?

Virgadamo: Well, I think connectivity matters quite a bit. I think the ability to access data, to access your colleagues on a real time basis matters quite a bit and many of the public tech companies in the world were providing services that were already well positioned to provide this sort of thing. I think some of the other areas that we see potential benefits long term are data analytics. We've seen a strong trend already in the past few years towards data analytics. You mentioned acceleration of trends earlier. I don't think anything is different in the tech space. We think COVID ultimately accelerates some of those trends towards digital advertising, e-commerce. So we think tech is ultimately a purveyor of the ability to enter into a work from home post-COVID world that relies on a kind of digital connectivity that wouldn't have been possible in prior recessions or had this virus hit some period earlier.

Ellen, let me let me ask you about just health care in general. Clearly, the crisis was precipitated by a health care crisis. How are you thinking about that in your forecast going forward?

Zentner: Yeah, so there are two big themes to look at here. I mean, one is consumer risk aversion and what determines that? How do households internalize it and how long does it last? And of course, if you have accelerating waves, renewed waves of accelerating cases, then households can be hit with that over and over and over again. And so that ends up having a more longer run impact on consumer spending. And, of course, would probably even more so accelerate some of the trends that you've talked about.

The other big theme from that is that the massive amounts of job loss that we've seen, incredibly high rates of unemployment, have uncovered, you know, serious issues in how we deal with people when they lose jobs. So you've got millions of people that have lost health care because they lost a job. So I think these are elements that are going to be more lasting on the other side of COVID just because we have the opportunity here to right some wrongs, again, that have been uncovered.

Virgadamo: I think that last point on the ‘how we're dealing with the labor market’ has implications beyond just policy. Part of the report was a fantastic contribution from our environmental, social, and governance team who looked at exactly that. And they said, what are the implications for the labor market when you can have the unemployment rate spike so quickly? What should be the focus on corporate responses, particularly around the treatment of employees and to some extent, customers? And we think what, to your point, we've exposed is a big gap in the way the system works right now. And we think it's not just going to be about legislative action going forward, but we would expect an enhanced voluntary corporate action program to provide enhanced benefits to employees. And would further expect maybe some shareholder pressure to renegotiate some of the social contract dynamics around how corporations think about dealing with employees and what the responsibilities they owe to them are. Maybe another point I could bring up to you or ask you about is, how do we think about the workforce on a going-forward basis? If people are working from home, does that have any implications for the composition of the workforce?

Zentner: So it can. I mean, I think there can be a really positive outcome here in terms of labor force participation and the type of labor force participation that we're getting. I mean, think about working moms. Right? Working moms that may have had marginal attachment to the labor market. Here's an opportunity for much more flexible hours and a chance, for particularly women in the labor market, to participate in a more robust way. Think about other groups that have been left out that need those kinds of flexible work arrangements, the disabled population. I mean, there's a lot of opportunities here to pick up a lot of those folks in employment that weren't able to do that before. I mean, we've certainly proven that productivity can remain high, that connectivity to your teams can remain high. We've removed the stigma from working from home because from the little guy all the way up to the big, big boss, everybody's working from home. And so we can appreciate it more. And so having removed that stigma, I think that's one reason why our estimates are that we'll still end up with about double the amount of work from home arrangements than we had going into the lockdowns. And I think it's, you know, out of all of the analysis that we've done, I loved it that this was one of the positive nuggets that we were able to pull out of it.

Zentner: Thanks for coming on the show. It's always great to chat with you.

Virgadamo: Thanks for having me, Ellen. Great to spend time with you as well.

Zentner: And thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple podcast app. It helps more people find the show.