The World, Post-COVID19: Economic Recovery and Industry Predictions with Yusuf Alireza
Yusuf Alireza is the founder of ARP Global Capital, a Dubai-based fund management company that invests across a number of themes in emerging and global markets. He spent 20 years working at Goldman Sachs in New York, London and Hong Kong, prior to which he was the CEO of Noble Group, a Fortune 100 company.
We had the pleasure of speaking with Yusuf at our AGM in October, where we held an informative discussion around the investment outlook of the post-COVID19 world. From insights into worldwide economic recovery to personal and professional future predictions, Yusuf shared his expert answers on some of the most pressing questions of our times.
On Economic Recovery
We kickstarted the conversation with a discussion around the state of the market and the dynamics of economic recovery. Yusuf explains that, first and foremost, there has been significant misreporting by strategists and market participants arguing that the US equity market was largely disconnected from the US economy. The correlation holds in specific situations, but not in the current one. In typical recessions, the business landscape is divided between a majority number of companies that are negatively impacted, and those that typically perform better. The present crisis is characterized by similar trends, except for the fact that, not only are some industries and companies doing better, their growth and scale is rising exponentially. Their opportunity set is witnessing unparalleled acceleration, with some reporting two years of adoption rates and transformation happening in the short time span of two months.
For much of its recovery, the US stock market was behaving in perfect rationality, with certain businesses (namely in E-Commerce, Big Data, Gaming, the Future of Work) exhibiting outstanding market and stock performance, and others (in travel or leisure) reaching new lows. The argument that the stock market was disconnected from the economy is simply factually incorrect.
Yusuf continues by explaining that the shape of economic recovery is largely dependent on two factors: policy flexibility and implementation, and management of the health crisis. As extraordinary as this event has been, the playbook that the market and economy have followed has been consistent with previous event-driven recessions. There are certain countries that had the policy flexibility to respond to the crisis in both size and speed. Those countries are most likely to see a V-shaped recovery.
A recession is similar to falling off a cliff, and policymakers play a big role in building the bridge to the other side of that cliff to protect businesses and individuals from the fall. In its response to the pandemic, the US has built that bridge. Its GDP fell by 20-30% at the onset of the pandemic, and the country is set to incur a deficit amounting to 27-30% of that GDP in 2021. Yet, in an environment of monumental economic collapse, disposable income is expected to increase nation-wide. This is because the size and scale of the national fiscal and monetary response to the crisis is allowing for that recovery. In fact, the US Federal Reserve is expanding by 30%. Other countries don’t have that policy flexibility, including Latin America and the Middle East, while some, especially in Asia, are recovering largely due to their effective and successful management of the health crisis.
As an experienced investor, Yusuf imparts some wisdom when it comes to thinking about the direction of future investments. To him, it is important to be cognizant of the fact that everything we know in our heads is about the past, but every important decision we have to make is about the future. This should necessarily come with a level of humility as investors think through the potential of specific opportunities, especially in the unprecedented times of our current world.
As capital allocators, it is worthwhile to spend energy and time thinking about the countries, companies and industries that are being, and will continue to be, accelerated by the pandemic, and are strategically and well-positioned to come out of the crisis winning and thriving. For Yusuf and the team at ARP Global Capital, these include:
Cloud services. The projected statistics for the cloud computing sector are presenting a tremendous and promising opportunity for the long run: 86% of CIOs are planning to multiply and accelerate their public cloud services adoption, and spending on cloud services are set to increase by 28% until 2022 - four times the rate of other IT spend.
E-Commerce. The industry is at a point of no return. Yusuf explains that it’s not only that adoption of these platforms has increased; it’s also that those who were typically unlikely to use these services are now making most of their purchases online. Once users have made that transition, the chances of return are slim, turning E-Commerce into one of the industries that will witness long-term disruption even in the post-COVID world.
The Future of Jobs. Working from home is here to stay. Tata Consultancy Services is an example, among many, of a company planning to only have one-fourth of its employees work from its physical facilities by 2025. Many are following suit, which has significant cost and business implications, from savings on physical spaces and commute compensations to greater workforce productivity and access to a global talent pool.
Contactless payments. MasterCard witnessed a 40% growth in the adoption of contactless payment methods in the first quarter of the year. While digital payments were already widely used pre-COVID, the pandemic catalysed their adoption, a trend that is forecasted to live through the decade to come.
5G. According to Yusuf, 5G will be disruptive on many fronts, especially in its later and more advanced stages of development. It will be transformational in terms of what and how much businesses will be comfortable storing in the cloud; in terms of the Internet of Things and how many device connections users can make and in terms of the computing power of the devices in our pockets, to name a few.
Renewables. The crisis spotlighted the environmental impact of human activity, stimulating dialogue and rallying masses of people around the cause of sustainability and climate change. It has generated renewed interest in renewable energy. According to Yusuf, transitions into more sustainable life and work styles are imminent. Today, solar power is more competitive than gas as a source of energy, and equally competitive to coal.
With the advent of the vaccine, it’s also useful to also start thinking about the businesses that stand to benefit from things going back to normal, and directing investment in those spaces. Current predictions indicate that the US and Europe are likely to be vaccinated by the second or third quarter of 2021. The next leg of the rally will be driven by cyclicals and the industries set to thrive as the world returns to “normal”.