Investing post-Covid— forget about the consumer

How should you invest post-Covid 19? Forget about the consumer; it will be the time for business to business services.

Article updated: 14 May 2020 1:00pm Author: Michael Baxter

One day this crisis will be over, and since investors are supposed to be one step ahead of the economy, now is the time to think about the response.

The problem can be summed up by the purchasing manager's indexes that were released this week. They were simply terrible.

Now I don't want to spend much attention looking at the PMIs; we all knew they would be bad. But the scale of their fall is shocking. The composite purchasing managers index (PMI) tracking Eurozone manufacturing and services didn't merely fall to its lowest level ever. Before I go any further, let me create some context. With a PMI index 50 is the key number. Any reading above suggests growth; any reading below suggests contraction. Usually, any score below 45 elicits headlines proclaiming doom. Anything below 40 indicates a significant recession. Until recently, the lowest ever reading was recorded in 2009 when the index went close to 30. The index measuring April 2020 fell to 12.

Yes, 12.

In India, the PMI tracking services dropped to 5.4.

The UK composite PMI fell to 13.8. And as J write these words, the Bank of England has said that the UK will see its deepest recession ever — it's hardly surprising.

The J.P. Morgan Global Composite Output Index dropped to 12.7. It matters not where you look; it has been carnage.

Except in China. In the economy behind The Great Wall, the Caixin China Composite Index for April measuring output stood at 47.6. The index did fall to close to 30 earlier in the year, but the bounce-back has been significant.

Now we could take some comfort from this and conclude that as China has bounced back strongly, so will the rest of the world.

I am not so sure. China is an outlier. It is clear that globally, unemployment is going to fall to appallingly low levels.

If Covid went away tomorrow morning, then maybe the global economy would recover quickly. But I think this virus will be a constant threat until there is a vaccine. There is a real risk that it will return with devastating effects on the autumn — as happened with Spanish Flu. I think the US will be especially vulnerable to this return because of the woeful way it is continuing to deal with the crisis. Yesterday, total debts were only just short of the all-time high, they are rising fast in some states, yet there is talk about going back to normal.

I have a personal theory that the spread of the virus is climate-related. Earlier in the year it struck in regions of China, Iran, Italy and Spain which were of similar latitudes. Then it spread north to France, UK and New York. I would not be at all surprised to see infections fall in spring and summer, but am a little scared about what will happen later in the year.

It is naive to think, in such circumstances, demand will bounce back.

Digital switch

What we will see, post-Covid, is a continuation of the trend seen during the crisis of a switch to digital. We are also seeing increased automation. Remote working will drop back, but will be at permanently higher levels seen before the crisis.

This will mean, less people working in city centres — with a massive knock-on effect on commercial property, spilling over to residential property.

Unemployment will recover slowly, squeezing consumer demand.

But, thanks to the acceleration in the adoption of digital technologies and more people working from home, productivity will see its fastest growth this century.

Economic output will recover reasonably quickly, but unemployment will remain high, as output per unit of labour will increase.

Government stimulus

Government stimulus will be essential to stimulate consumer demand. I am not so worried about this, leading to suffocating levels of government debt, leading to higher taxes and austerity. Economies such as the UK can afford higher levels of government debt to GDP for as long as it can borrow at close to zero per cent.

As for government borrowing post-Covid, what matters is annual government borrowing to GDP. For as long as borrowing to GDP is less than growth in GDP, then it will be sustainable.


But before this crisis, I had argued here many times that we are set to see a period when business to business (B2B) will excel, but business to consumer (B2C) will struggle.

What does that mean? In tech terms, cloud providers, software as services providers, etcetera will flourish.

Retail, especially traditional retail, will flounder. Online will do better, but even in this respect, I think most of the good news will be priced-in.

As I keep saying, giant techs will flourish. In addition to the really big techs, also look at the likes of SalesForce, Nvidia and Tesla.

I think Zoom shares will continue to rise, now that the company seems to be grappling with security and privacy issues.

Watch Slack too. I have not got the hang of the product yet, but more tech-savvy people than me swear by it.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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