From Disruption To Opportunity: What Sectors Should Impact Investors Target Post-COVID-19?

• More business will be handled remotely, requiring improved internet services, bandwidth, streaming technology, and training. Commercial real estate, parking lots, and transportation services are likely to suffer by contrast. Many will celebrate this change for environmental and safety reasons; further, at some level, this shift should also save costs.

• More goods will be delivered directly to homes or businesses. We expect increased sophistication with warehousing, logistics, and distribution. Increasingly, distribution will tend to disintermediate retail points, with a preference for larger or more specialized distribution points interfacing with customers ordering via the internet. SEAF has seen relevant examples from companies we have invested in Bangladesh, Vietnam, Serbia, and Morocco, as well as Europe and the USA to that effect, and we expect more.

• Education and training will be increasingly virtual. SEAF is already working with online education companies in Morocco and Vietnam. Online education services provide greater access to the best-qualified teachers, save transportation and residential costs, and thereby “democratize” education, particularly in critical STEM disciplines by making quality education available to students everywhere. In particular, students outside major cities will be able to learn at higher levels heretofore reserved for urban hubs. We expect private, more practical training services to expand as well, which will be more practical/vocational, albeit at more sophisticated levels. We expect to see significant reductions in residential universities and private schools. Bridges Academy in Kenya and Nigeria could provide an example of a business model that is oriented to providing a higher and more consistent standard of instruction at a lower per-student cost—all factors which could make a difference post-COVID-19. The role of governments in this context might be to provide all students with better access to bandwidth and tablets or computers, along with frequent standardized testing, instead of more school buildings or administrators.

• Supermarkets and central kitchens will increase their market share. The convenience of food delivery coupled with the reduction in food waste from central kitchens should drive a shift to prepared foods away from smaller restaurants. Our Chengdu (Sichuan, China) office is reporting that although most factories have resumed full-time work, restaurants are restricting their service to carry out. Starbucks is still only letting one customer at a time enter the store for order and fulfillment. Our Kolkata central kitchen delivery company would seem to be much better placed for long term growth, profiting from its proprietary supply chains and relatively limited menus. Concerns about food safety are also more likely to require such traceability. Similarly, supermarkets have developed a sophisticated array of food delivery and ready-to-eat-dinners which seen well-positioned post-COVID-19.

• Fewer restaurants will flourish. Mass tourism and entertainment will generally not. Fast food restaurants and their ability to act as distribution points or effect delivery are likely to stay relevant for the same reasons as the above, while exclusive (“white linen”) restaurants are likely to become less numerous, more private, and more niche (read expensive).

• Health and wellness will become more important. Given the clear association between obesity and respiratory ailments and COVID-19 vulnerability, modified business models in these industries should increase. This includes online exercise regimens and safe/sanitary and specialized medical procedures drawing in clients from the region. SEAF has seen a backlog forming in elective medical procedures and dental work in many countries, which will be satisfied after COVID. General hospitals may suffer unless they are “reinvented”, as they may be associated more clearly with infectious diseases or collateral infection risk than before.

• Supply chains will go regional. Larger companies, wary of exposing themselves to another China shock, will build alternative, regional supply chains. In the North American markets, for example, this is expected to benefit Central America and the Caribbean. I have written more about this trend here.

• Regional agribusiness chains will increase. As economies regionalize their supply chains, we expect local producers and supply chains to flourish. In addition to reducing waste, traceability and resiliency will be valuable.

• Energy will trend toward resilience. In most emerging market countries that do not produce fossil fuels, distributed solar energy should also do well, reducing energy volatility.

• In terms of financial instruments, investor return expectations will clearly be reduced in favor of more resilient business models (lower risk).  Longer-term debt with equity kickers and/or accelerating equity rights could and probably should increase as an acceptable compromise instrument.

Having lived through a number of sovereign debt meltdowns, I do worry about too much debt versus equity. Loan agreements look secure until defaults occur. Hands-on, longer-term relationships with good entrepreneurs in “have-to-have” industry sectors, whose interests can be aligned, seem safer. We may see governments less able to bail out insolvent debt institutions, given the high levels of sovereign debt.

These insights aside, we hope this crisis passes soon and that the global economy, particularly the SMEs which are at the core of SEAF’s work and which frequently make up the majority of economies in emerging markets – will recover more swiftly than anticipated.