The Complicated Path to Recovery
The article below is from our BRIEFINGS newsletter of 21 April 2020
The path to full economic recovery is likely to be complicated and gradual, as wide swaths of the economy are forced to rebuild and adapt. At a recent Forum discussion, Goldman Sachs Asset Management’s (GSAM) Katie Koch, co-head of the Fundamental Equity business, spoke with Steve Strongin, senior advisor at the firm and former head of Goldman Sachs Research, about the forward path.
Katie Koch: What is your view on the trajectory of the economic recovery?
Steve Strongin: Many people are focused right now on the macro path of the recovery, but from an investing and psychological perspective, it makes more sense to focus on the pattern of recovery. The halt in economic activity was sudden and broad, but the resumption in activity is likely to be gradual as different sectors of the economy resume at different stages. The initial recovery will be swift in the parts of the economy that are easier to restart, such as manufacturing. The transportation sector will bounce back—albeit from record-low levels—although activity isn’t likely to reach pre-crisis levels. Meanwhile, regions with less community virus spread are likely to reopen sooner than in places that have been hit hard. It will be easier, for example, for a restaurant in Chicago to open its doors than in New York City. In addition, the cities where restrictions were the greatest will see the sharpest rebound.
It’s likely that the overall level of output remains lower than pre-crisis levels for some time. Sectors hit hard by the pandemic, such as travel, leisure, lodging and restaurants, could see consolidation and new entrants, but whether they bounce back entirely will depend on medical advancements. We’re likely to see some permanent damage to servicers of small businesses, such as wholesalers and smaller shipping companies, while sectors benefiting from secular tailwinds, such as cloud computing and genomics, will accelerate once economies normalize.
Katie Koch: The pandemic is forcing an acceleration toward an e-world. How will those forces change the composition of the economy post-crisis?
Steve Strongin: Some sectors are going through structural changes and many of those changes will become permanent. Take-up rates of telemedicine, tele-banking and e-commerce have accelerated, particularly in rural areas and most notably beyond millennial populations. The video conferencing application, Zoom, has seen five years of digital adoption in the last two months, while online banking and e-learning have expanded at a similar pace. Acceleration in the uptake of telemedicine has been particularly evident in the 55+ age group as this population has more of an incentive to adopt this technology. Companies with employees working remotely have also been positively surprised by the stability in productivity. We expect this will lead to a friendlier attitude about work-from-home policies after the crisis which could, in turn, have a dramatic impact on reducing commuter traffic in congested cities, such as Chicago and Los Angeles. The real estate sector, however, is likely to become more complicated. Young people will still want to live in cities to be with other young people, while families with young children may find cities—due to a reduction in traffic congestion—more livable.
Katie Koch: One of our investing themes is the impact that the Millennial generation has on sectors and industries. This is a generation that typically values experiences over products. Do you expect that to change?
Steve Strongin: Depending on the speed at which the economy recovers, it’s more likely that the desire for experiences will only accelerate. For all the comparisons made with the Great Depression, it is worth remembering that the Spanish Flu of 1918 was followed by the roaring 1920s. These kind of events tend to result in situations where survivors want to live life to the fullest, without any regrets.
Katie Koch: We have been saying for a few months in GSAM that while monetary and fiscal responses are helpful, what the world really needs is a vaccine. What role do you think healthcare will play in this recovery?
Steve Strongin: We will see three threads of medical innovation: the development of a vaccine, late-stage treatments and an anti-viral treatment. The timing of each is uncertain for now, but it’s important to keep in mind that there is a bias to finding late-stage treatments simply because they are easier to test than vaccines and anti-viral treatments. That said, there is a fair probability that we will have new ICU and anti-viral treatments by mid-summer and a vaccine by next spring. Each of these medical advancements changes the texture of the recovery. If the late-stage treatment isn’t as frightening as getting intubated, then more people will be willing to take more risks. With the development of an anti-viral treatment, coronavirus essentially becomes another version of the seasonal flu. And if a vaccine is developed, then we will be living in a very different world.
Katie Koch: In GSAM, our fundamental investors are students of the concept of “creative destruction” where innovations in products and businesses force established companies and businesses to either adapt or die. In one sense, economic downturns are capitalism’s sorting mechanism, revealing weak business models and stretched balance sheets. What’s your view on how the pandemic could reshape the economy?
Steve Strongin: A key legacy of this pandemic will be heightened innovation and greater collaboration in healthcare. The FDA’s testing protocols are being viewed as too conservative so, as a result, we’re likely to see testing regimes broaden and speed up. There may be a greater willingness to test treatments on healthy or moderately healthy populations as the testing regimes become more liberal. We may also see meaningful advances that relieve burdens on healthcare systems given increases in expenditure on basic healthcare infrastructure. Beyond healthcare, we should expect to see new business formations as long as there is a relaxation in the regulations that startups face. It is easier to start a business today than ever before because of enabling technologies such as AWS, Azure and Stripe. But even with government support, some businesses will not make it through the crisis.
More broadly, this crisis provides companies with an opportunity to rationalize, review existing practices and restart growth on a more sustainable path. Companies today are being judged by governments and society on their responses to this crisis. Companies are very aware of their social mission in terms of how they treat their employees and customers, while also engaging in efforts to aid the health response. A collapse in oil prices can pave way for cleaner energy providers with a structural advantage to gain market share. Meanwhile, high-cost, high pollutant producers, particularly in emerging markets, will be hard pressed to attract capital.