COVID-19 is one of the worst infectious diseases to afflict humanity in recent decades, and the lockdowns to slow its spread have had profoundly negative effects on the world’s economy and people’s way of life. Yet while most of these effects, such as higher unemployment and lower demand, are wholly negative, there are some side-effects of the lockdown that are unexpectedly positive for investors. Here are three: increased demand for technology; strengthened competitive positions for companies with strong balance sheets; and cheaper short-term prices of shares in companies with excellent long-term prospects.
Lockdown regulations have acted as an accelerant for services and infrastructure offered by technology companies. Forced to stay at home, consumers have been watching more streaming video and buying more online. Those fortunate enough to still be in work have been connecting to their office computers and colleagues remotely, increasing the need for networking and cloud computing solutions.
Of course, as the lockdown ends, some increases in technology use may decelerate; yet new habits will have been formed. Many who have never worked at home before have now developed a taste for it, enjoying the advantages of reduced travelling time, increased flexibility, and freedom from distractions. Companies will think long and hard about safety issues before allowing all their employees back into offices. Home working, at least some of the time, is here to stay.
Alibaba, the Chinese internet giant, is as example of the kind of emerging markets company benefiting from increased demand for online shopping and cloud computing. Tencent, the world’s largest video game company, is also advantaged as more consumers seek entertainment at home. In Brazil, Mercado Libre, sometimes called the Amazon of Latin America, will reap the rewards as many more people shop online. In the Middle East, United Arab Emirates-based Network International, a payment solutions provider, may have been hurt temporarily by the blow to travel (Dubai being a major tourist and business travel destination), but I believe it will benefit greatly from a long-term move from cash to card. The vast majority of consumer transactions in the Middle East and Africa have historically been in cash. Today, to avoid catching the virus, people are using cash less. Debit cards, credit cards, and digital mobile wallets have immense growth potential in the region.
The economic damage caused by COVID-19 is sadly not falling equally across all people in society – the poor and low-paid faring worse. Nor is it falling equally across companies. Companies with strong financial positions – little debt and sound balance sheets – are better able to weather the downturn. This could leave them with deepened competitive advantages – what we call, using a term coined by Warren Buffett, ‘moats’ – that will enable them to be even more profitable when revenues eventually improve. We search emerging markets for high quality businesses with strong balance sheets and deep moats. Among banks, for example, we think HDFC, the India-based financial services company, and Bank Central Asia, based in Indonesia, are exceptionally strong. All banks will be adversely affected by the downturn – banks are perhaps the single most economically-sensitive sector – and their non-performing loans may in general increase. Yet strong banks will not only survive, but go on to flourish.
Cheap share prices
While we believe in buying great, growing companies with strong competitive advantages, we only do so when the price is right. As the coronavirus spread, initial aggressive selling offered what we viewed as attractive buying opportunities. Mercado Libre, mentioned above, is a company we have long studied, and its share price looked very cheap to us during the panic of late February and March. Since then, Mercado Libre’s shares have not merely bounced back but have attained new all-time highs, as investors realised that in just a few weeks Brazil’s online adoption had advanced the equivalent of years. The selloff gave us a number of opportunities to add to sound companies with great long-term prospects and strong balance sheets, but which we had been unwilling to buy previously due to their relatively high share prices.