How Covid-19 might change the world for ever – revisited (part 1)
World in Motion – Global equities blog

How Covid-19 might change the world for ever – revisited (part 1)

Global Sustainable Outlook strategy portfolio manager, Pauline Grange, recently featured on our Eye of the Needle podcast. We revisited her “10 factors that could change economies & markets forever” viewpoint from April 2020 to see if any of her initial thoughts have shifted in the intervening months …

PEAK GLOBALISATION

What are your current thoughts on peak globalisation and how – in terms of consumption and supply chains – countries will start to think more about where goods, consumables and “stuff” actually comes from?

At the beginning of 2020, when China went into lockdown, we saw a lot of disruption in supply, whether that be in electronics, automobiles or healthcare consumables such as PPE, which we needed in our hospitals. So there has been a growing awareness at a corporate level that businesses can no longer rely on a single region or country, such as China. In response, we have seen companies begin to diversify their supply chains and move some supply more locally. Nowhere has this become more evident than in the technology sector.

In 2020 there was an escalation of the US-China trade war and we saw firstly the US put a number of trade embargoes on Chinese tech companies such as Huawei, where the US no longer allowed these companies to have access to US intellectual property or patents. China, in turn, has become more insular in its tech investment and realised it can no longer rely on US technology companies. So in 2020, for the first time, China invested more than the US in research and development and we are starting to see this regionalisation of technology, particularly in climate technology.¹ This is an area where people are beginning to refer to “climate wars” as China has invested very heavily in electric vehicles, battery technology and solar technology and is starting to dominate there; whereas Europe has become the leader in renewable energy.

As fiscal stimulus packages come into place in Europe, the UK, and the US, governments are again going to prioritise local jobs and local companies. So globalisation isn’t going to disappear, but it is definitely changing.

ONLINE CONSUMPTION GROWS and CASH TO CARD ACCELERATES

The growth of online consumption and the shift to digital payments is here to stay isn’t it?

Indeed it is. Again, the pace of the transition – whether that be from offline to online consumption or cash to digital payments – has exceeded everyone’s expectations. Consumers were forced online as lockdowns ensued around the world, but also corporates had to accelerate their investments into their own digital platforms. In the US online sales growth in 2020 reached an incredible 44% year-on-year – which is three times the 15% growth we saw there in 2019. Online penetration in the US is now in excess of 21%, versus 15.8% in 2019 – an increase of 5.5 percentage points year-on-year and the highest since records have begun².

Several of the digital corporates that I have spoken to about this have said that the Covid-19 pandemic has accelerated this transition by several years. That level of growth is unlikely to be repeated in 2021 so the question becomes: will that absolute dollar amount of online consumption drop? I do not believe it will. Firstly, corporates continue to invest in digital platforms and continue to transition their businesses towards an online world, while consumers are increasingly comfortable purchasing online and certain parts of the demographic who had never consumed online before have now embraced these digital platforms. I see this with my in-laws who never consumed online before the pandemic, but now happily make recipes from online groceries firms and buy all their groceries online, and they love the convenience of it.
So there has been a cultural shift and the huge boom in ecommerce has continued in China post-lockdown, with ecommerce sales remaining robust and companies continuing to invest in online platforms such as Tmall etc. The growth may not be as high, but online consumption is here to stay.

THE RISE OF THE “GREEN” AGENDA and THE RISE OF MORAL CAPITALISM

How do you see these two factors progressing and are the two intertwined?

These are large and complicated topics. If you look at the rise of the green agenda, we can clearly see it has become more prominent and is on the agenda of governments around the world. The globalisation of “net zero” policies in 2020 has been a big positive. This is where governments will set a target for a certain year to have net-zero carbon emissions, which brings them in line with the Paris Climate Agreement, where the goal is for the world to have net zero emissions by 2050.

Firstly, we saw the EU put its green deal at the heart of its Covid-19 fiscal recovery program, while also accelerating its decarbonisation target to reduce carbon emissions by 55% by 2030 (from 1990 levels).³ But the big surprise in 2020 was China – the biggest contributor to climate emissions – setting a target to be net zero by 2060.4 This has helped have a meaningful impact, with nearly half of the world adopting climate-neutrality goals by the end of 2020. Now, with Joe Biden as president in the US the country may be more likely to set a net-zero target; were it to do so, we would have approximately 60% of global emissions covered by net-zero agreements this year – that is a big positive for climate change.

If we shift, then, to moral capitalism, we must firstly ask what we mean by moral capitalism or responsible capitalism as it is also known? Capitalism has previously been very much focused on one type of stakeholder: shareholders or the owners of the business, for example. This is great, but increasingly there is pressure on companies, both at a government level as well as from consumers and the wider population, to look more closely at all stakeholders. Whether that be how they treat or support their employees and/or suppliers, or whether they create value for consumers.

There is also a willingness to look at the true cost of business, not just in dollar amounts but in the impact corporates have on the environment. What we saw during the pandemic has really heightened the importance of this. Take the Black Lives Matter movement, which was a movement against systematic racism around the world. That has forced many companies to address their employee base by striving to address and improve racial diversity within their employees. Supply chains have also been under the microscope, with some retailers being named and shamed when they didn’t honour their contracts with third parties in Bangladesh, which led to heightened poverty levels for the country. How you treat your suppliers is now having real world implications.

So are the two intertwined? This sort of reshaping of how we view capitalism and the green agenda. I believe it is. Corporates have a moral responsibility, both at a social and an environmental level, while as we see the green agenda rise they will also face increased regulation. Their access to cheaper financing may somewhat rely on whether their products help resolve some of the environmental problems around the world, ie whether that financing be through social or green bonds, they will see a valuation uplift if they shift towards more environmental or socially aware products.

¹BofA research, February 2021
²https://www.digitalcommerce360.com/article/us-ecommerce-sales/
3BBC.co.uk, Climate change: EU leaders set 55% target for CO2 emissions cut, 11 December 2020
4 The Guardian, What China’s plan for net-zero emissions by 2060 means for the climate, 5 October 2020
25 February 2021
Pauline Grange
Pauline Grange
Portfolio Manager, Global Equities
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February 2021
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