COVID-19: The Great Accelerator
As we begin to emerge from the economic lockdown and confront the aftermath of the COVID-19 pandemic, a few things have become clear to us. The impact of COVID-19 has been massive: unemployment rates not seen in our lifetimes, unprecedented levels of government stimulus and a huge decline in GDP growth are just a few of the macro effects we have witnessed. And this doesn’t begin to measure the impact of more than 100,000 lives lost in the U.S. and countless others fighting the illness. Not surprisingly, the stock market has been extremely volatile: a sharp down-draft as the pandemic rolled across the world and the global economy was put on pause followed by a steep recovery when the massive wave of government-provided stimulus took hold. Now that we have seen this liquidity-fueled bounce, the hard work begins for our economy and the stock market. What path will the economy take? Will consumer demand recover to pre-pandemic levels? Will small businesses re-open and begin to hire and pay rent again? Will we work from home forever, and if so, what happens to urban centers and commercial real estate? How do governments return to fiscal health? There are many unanswered questions and there is much uncertainty.
As with all significant events, we have seen a great change in our behaviors and we seek to determine which of these changes are permanent and which are merely momentary responses. With the scale of the pandemic being much bigger than normal, we expect many of the behavioral changes to be proportionate and, in many cases, permanent.
We believe that the behavioral changes resulting from the pandemic won’t be revolutionary so much as evolutionary. We think of COVID-19 as the great accelerator; a major event that has added significant momentum to many secular trends that had been building prior to the pandemic. Such already established trends include: the growth of e-commerce, an increase in video conferencing and working from home, a shift away from cash to electronic and digital payments and millennials moving from urban centers to suburbs.
Within our thematic world of environmental investing, we are also seeing an acceleration of important secular trends. We see many examples of such accelerating trends across our nine environmental investment themes in Essex’s Global Environmental Opportunities Strategy. Just a few examples include increased use of factory automation, greater demand for resilient resource supplies, and higher levels of asset tracking and supply chain assurance, and the internet of things and connected infrastructure.
Since the change in the U.S. corporate tax code several years ago, many industrial companies have been focused on re-establishing manufacturing bases and related supply chains in the U.S. This re-shoring trend further gathered steam as the growing trade dispute with China and related tariffs materially increased costs for those companies with significant manufacturing or supply chain footprints in China. Most recently, the coronavirus pandemic has increased the urgency of this shift as business risk has skyrocketed for those companies reliant on manufacturing capacity and sole-source supply chains in China. But as these factories and supply chains are re-located to the U.S., we don’t expect to see the same labor intensive manufacturing processes. Rather, we expect a significant investment in factory automation such as machine vision systems, internet capabilities, and increased use of robots and cobots. Such automation won’t eliminate the worker, but will allow the worker to work more safely and more productively. The factory will be more energy efficient and flexible, allowing a greater range of products to be produced in smaller batches. Further, these re-located factories will be connected to more efficient distribution networks that will use scanners, robots, machine vision systems, and internet connectivity to process more materials and goods faster and more efficiently. Significant recent advances in computing power, robotic capabilities, sensors and machine vision systems will enable safer and more efficient and flexible manufacturing capabilities. Companies such as Universal Robotics (owned by Teradyne Inc.), Cognex Corp., Keyence Corp. and Sensata Technologies Holding plc could all see accelerating demand in the coming years.
Another example of an environmental trend that is being accelerated by COVID-19 is a focus on resource reliability. Prior to the onset of the coronavirus, the surge in the frequency and severity of storms and wildfires has exposed significant risks and vulnerabilities in the sourcing of key resources such as power and water. The pandemic has further highlighted a need to reduce these significant business risks leading to demand for resilient sources of clean energy and water. Increasingly, the electric grid will be enhanced with new technology that will allow greater resiliency, better management of volatility caused by intermittent power generation, increased use of microgrids, and more efficient use of local storage capabilities. In short, power will be generated closer to the point of use through rooftop solar arrays. New software and infrastructure technology will allow the grid to be more resilient to outages and will more efficiently transfer and store cleaner energy. Companies that stand to benefit from this accelerated trend include Generac Holdings Inc., Cree Inc., Enphase Energy Inc., American Superconductor Corp. and Itron Inc.
COVID-19 has been a major economic and health event that has permanently impacted all of our lives. Our behaviors will change as a result of this crisis and this creates investment opportunity. Many established secular trends are being augmented and accelerated. Most importantly, we believe that the pandemic has highlighted human fragility and will bring about a permanent, heightened focus on well-being and a related commitment to clean cities and sustainable living. This is a good thing for our planet and for environmental investing.
Disclosures: This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience, and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. This does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product, nor does it constitute a recommendation to invest in any particular security. An investment in securities is speculative and involves a high degree of risk and could result in the loss of all or a substantial portion of the amount invested. There can be no assurance that the strategy described herein will meet its objectives generally, or avoid losses. Essex makes no warranty or representation, expressed or implied; nor does Essex accept any liability, with respect to the information and data set forth herein, and Essex specifically disclaims any duty to update any of the information and data contained in the commentary. This information and data does not constitute legal, tax, account, investment or other professional advice. Essex being registered by the SEC does not imply a certain level of skill or training.