Corona confinement and breaking habits

investment insights

Corona confinement and breaking habits

Stéphane Monier - Chief Investment Officer<br/> Lombard Odier Private Bank

Stéphane Monier

Chief Investment Officer
Lombard Odier Private Bank

Key takeaways

  • Attention is starting to turn to the long-term impact of the coronavirus after the ‘Great Lockdown’
  • Crises historically lead to social change but much depends on whether lockdown behaviours stick
  • Over time, we expect the pandemic to act as a catalyst or accelerator of trends in logistics, technology, globalisation, geopolitics and sustainability
  • Manufacturing may become more localised as newly ‘essential’ supplies are produced nationally
  • The eventual analysis of the pandemic’s management will include many personal, national and global lessons, in case we have to resort to lockdowns again.

As governments begin to reflect on strategies for letting half of the world’s population leave their homes, attention is shifting to the job of rebuilding economies, and which social trends will accelerate because of the pandemic.

As the impact of Covid-19 unfolds, longer-term changes in consumer behaviour and impacts on sectors from tourism to technology are attracting critical attention. Many attempts at projecting the longer-term impacts of the current coronavirus pandemic depend on the extent to which changes in consumer behaviour patterns turn out to be permanent once the lockdowns start to lift.

How long does it take to form habits that stick? The consensus, according to research from psychology, is that it takes around two months for a habit to form. The Chinese city of Wuhan lived through a period of almost two months in lockdown and many of the European states worst affected by the crisis are working to ease restrictions after a similar experience.

Historically, crises have led to historic social change. After the twentieth century’s World Wars, universal health services were put in place (though not by the US), women earned the right to vote in many democracies (though not in Switzerland) and joined the workforce in large numbers. After the terrorist attacks of 2001, we adjusted to airport security restrictions and the financial crisis of 2008 exacerbated inequalities, triggering a widespread rise in political nationalism and xenophobia.

This time, we can envision broad changes in connectivity technologies, globalisation, geopolitics and sustainability.


Technological dependents

Our dependence on technology has been obvious in the last few weeks. Online e-commerce has increased, putting demands on logistics and postal and courier services work to maintain deliveries while demand for remote medical appointments, or telemedicine services, has surged. Sales of personal computers, monitors and printers have increased as we adapt to working from home and children learned to school themselves since confinement.

The demand for ever-greater network capacity may continue to provide 5G mobile networks with a boost, especially considering the prospect of fiscal stimulus targeting connectivity. Digital sharing platforms, as well as potential implications for the value of commercial real estate, will all evolve as we adjust expectations of our living and working spaces both inside and outside the home.

The growth of remote working also exposed online security vulnerabilities. Zoom, a videoconferencing system, saw subscribers increase 20-times in the first weeks of confinement in Europe – only for many firms to ban employee use on security grounds a few weeks later. Inevitably, there will also be fears raised about the robustness of the internet’s architecture, both its cloud-based infrastructure and the physical data storage and cables that it relies on.

The pandemic will act as a catalyst, accelerating existing trends and underlining the fragility of others.

There will be handwringing about the failure of many governments to act sooner in response to the pandemic. Much of the world has not, for example, been able to follow the World Health Organisation’s “simple message for all countries: test, test, test” from 16 March. Nor has every government been able to provide the protective equipment, including gloves and facemasks that were the first line defences for health workers. Let alone the more sophisticated feedback from behavioural monitoring tools.

Technology will certainly be part of the response, in the form of mass medical testing and population monitoring. While problematic from the point of view of civil liberties, it is certain to become more common, even expected to contain additional outbreaks. New tracking technologies are already deploying in China and being studied in Europe with the backing of Google and Apple.

The pandemic is likely to act as a catalyst, accelerating existing trends in e-commerce, logistics and cyber security, as well as underlining the fragility of others.

We expect to see the production of critical items, previously taken for granted, re-centred at national levels

De-globalisation

Globalisation has been intensifying since  the second world war. But the liberalisation of trade in goods and services, facilitated and policed by World Trade Organisation agreements and China’s accession, has been challenged since the 2008/2009 great financial crisis. The greatest threat to a coordinated response to the current crisis is the collapsing political trust in the multilateral system, sparked by rising inequalities and exploited by populist politicians. The latest example is the US decision to withdraw funding for the World Health Organisation (WHO).

That matters because governments are in the economic driving seat, taking over where much of the private sector services has come to a standstill. This makes sense because governments can get paid to borrow and provide fiscal and monetary stimulus.

In 2019, the economic focus was on the reaction of manufacturing to the difficulties of coping with the US/China trade dispute. Now, we expect to see the production of critical items, previously taken for granted, re-centred at national levels. Medical facemask production, to take an obvious and timely example, is centred in Asia. France has only four sites capable of manufacturing surgical grade facemasks because until the current crisis the country assumed it would always be able to import whatever was needed to meet any shortfall. The French government is now boosting production five-fold. Furthermore, the issues of international cooperation and competition are neatly captured by the commercial haggling over facemask supplies. US President Trump, invoking his ‘America First’ policy, blocked the shipment of face masks from 3M to Canada.

Other industries may look to cut their dependence on low cost manufacturing in Asia and China, insourcing production and sourcing new supply chain solutions. Another example may be low value-added chemical components, suddenly deemed essential because they are the raw ingredients of basic off-patent drugs. We may see the same trend in food sourcing as we adjust to changing supply levels and face up to the fragility of our existing supply networks, reliant on “just-in-time delivery” that has contributed to a decrease in levels of stocks held in reserve.

The automation of industrial processes, warehousing and solving logistics bottlenecks will all undoubtedly accelerate to cope with the new urgencies and are likely to remain a priority for businesses long after the pandemic.

Travel is an obvious short-term casualty and raises questions about how quickly it will recover once movement restrictions begin to lift. We may see more corporate travel restrictions and a prolonged impact on leisure travel, in particular long-distance travel. That is likely to combine with travellers’ growing environmental sensitivities, and may generate some shift from air to rail travel. In the short run, any lasting change in business and leisure travellers’ behaviour may prolong the pressure on oil prices, despite the recent OPEC/Russia deal, depressing oil prices still further since aviation fuel accounts for 7% of global demand.

 

A new geopolitical axis

Given the very different experiences of managing the pandemic and controlling its narrative in China and the US, will historians look back at this period as a tipping point in the geopolitical balance of power between the US and China? That comes as some liberal western democracies look especially weakened by populist leaders and questions over foreign election interference, and the US prepares for another presidential vote in November 2020.

Will historians look back at this period as a tipping point in the geopolitical balance of power between the US and China?

Finally, the solidity of the European Union’s cohesion is under more scrutiny. The time taken to agree a common response to the pandemic across the eurozone, which remains rather limited in comparison with the scale of emergency spending on offer in Asia, did little to reinforce federalists’ arguments. After stumbling to a compromise and side-lining the idea of corona bonds, the eventual result may prove effective with the additional firepower of the European Central Bank.

In emerging markets, the impact of lower oil prices will probably generate a number of very different growth paths, stress-testing oil producers’ economic vulnerabilities and helping recovery in oil-importing countries, such as India and China.

 

Sustainability in a time of Covid

Will world leaders still see climate change as a priority with their economies in recession or recovering? The United Nations’ climate change conference, scheduled for November, is postponed into 2021.

From a climate science point of view, the current crisis is going to offer researchers an unparalleled opportunity to study the impact of human behaviour on the environment. There is a chance to learn what happens to greenhouse gases in the atmosphere when the world returns to 1950’s levels of international transportation. Will commitments to reduce greenhouse gases be weakened, faced with slowing economies? Or will the experience of lower levels of pollution, including in the emerging world, and an understanding of the positive economic growth impacts of investing in green infrastructure spur more action?

Changes are coming, if only because we will expect, personally, nationally and globally, to be better prepared for any repeat experience.

As residents of many cities have been enjoying cleaner air under lockdowns, public tolerance for a return to business-as-usual is likely to be diminished, along with increased recognition of the impact of air pollution on public health. Research is now linking exposure to pollution with the spread and mortality rate of Covid-19, through the effect of air pollution on the body’s immune response and on underlying, aggravating health conditions. A review of the causes and contributing factors of the crisis may reinvigorate efforts to tighten emission controls, especially in transport.

In addition, fiscal stimulus packages may provide a boost to green infrastructure. In the EU, at least, it appears likely that any long-term support programmes will be aligned to the EU’s Green Deal announced last year. Elsewhere, an increase in the availability of low-cost loans and capital will make investments in energy efficiency and renewable technologies more attractive, both of which require an upfront capital outlay but offer a positive economic return.

From a business sustainability point of view, the pandemic is highlighting weaknesses in infrastructure and the need for more investment. Until now, business continuity plans assumed any forced shutdown of a company’s particular site or offices would be compensated by other locations and did not envision the possibility for all sites to go offline simultaneously. The sustainability of numerous businesses will be scrutinised in new ways, and offer opportunities for the most nimble standouts, including tech sector firms.

Overall, we are watching China and Asia’s economic re-start carefully, not just from the point of view of experience of the virus, but with an eye on the evolution of consumer preferences, focus and possible opportunities.

An accumulation of social and political changes, consumption habits and technological demands are coming, if only because we will expect, personally, nationally and globally, to be better prepared for any repeat experience.

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