Covid-19 driving trends: a foot on the brake or the accelerator?

Robeco’s Trends Investing team follows three megatrends that will shape the future: Transforming Technology, Changing Socio-Demographics and Preserving the Earth. Each one has three sub-trends ranging from the spending power of a rising middle class in emerging markets, to increasing regulation around the world. They derive from the technological, demographic and policy-driven changes that have been shaping the world since the dawn of the internet age, the rise of emerging markets, and the realization that global warming represents a fundamental threat to mankind.

Long-term trends should not be adversely affected by the coronavirus crisis, as in principle, a trend is not susceptible to short-term or sporadic shocks such as epidemics or natural disasters. Yet, the scope and intensity of the crisis triggered by the Covid-19 pandemic obviously raise concerns. Furthermore, the measures taken to contain the spread of the coronavirus beyond the first wave of contagion may require us to change our long-term expectations due to the economic fallout that is accompanying it.

In this article, we discuss the likely impact of the Covid-19 crisis and its economic aftermath on all of the megatrends and sub-trends that our stable of five strategies invests in. Overall, we believe the Covid-19 pandemic and the global recession that is set to follow will not derail or stop the trends that shape our investment strategies.

On the contrary: the crisis may well accelerate the impact of some of them – particularly the usefulness of digitalization in a locked down world – rather than put a brake on them. Indeed, we believe that while the coronavirus crisis will clearly be recessionary in the short term, there are still tailwinds for thematic investing. This is because the Covid-19 crisis has led to:

• A more prominent role of government in economic and social affairs, leading to more regulation of both corporate and social behavior. This means an increasing socialization of parts of the economy, and an increased focus on the collective approach, as opposed to satiating individual desires. This benefits companies that are focused on ‘Preserving the Earth’.

• The sheer size of stimulus measures as central banks continue to engage in an unprecedented level of quantitative easing until economies start to recover. While this is aimed at protecting the more vulnerable parts of the economy, it will also mean interest rates stay lower for longer. This benefits companies that are high-growth, which are often in the technology sector: ‘Transforming Technology’.

• A decreased pace or even retrenchment of globalization, as countries and companies reassess the desirability of long international just-in-time supply chains. Diversifying and localizing the number of suppliers in view of the cross-border bottlenecks that have come to light are expected to be more widely adopted. This benefits companies engaged with increasing the need for automation and digitalization of the supply chain: ‘Transforming Technology’.

• For investors, the lower-growth environment means high-growth companies are likely to remain in favor for some time, and enjoy a scarcity premium

The biggest winner of all these changes is clearly our digitalization trend, particularly in fintech, going cashless, and the connectivity needed to facilitate working from home. There will be spin-off advantages for cybersecurity, health care and all forms of e-commerce, all of which were already on an upward trend. The only sub-trend that may be negatively affected is the emerging middle class, whose spending power is diminished until their economies can fully recover.
Markets seem to be largely in agreement with this assessment, as the relative performance of the majority of our trends strategies has been very good, particularly in relation to equity sectors adversely affected by the lockdowns. The high-growth companies that embody the trends space are likely to remain in favor long after the coronavirus crisis is over, making them ideal for investors with their eye on the future.