The winners and losers from this crisis

Patrick Poke

Livewire Markets

Challenging periods, like the one we’ve just been through, are what separate the wheat from the chaff in the business world. While some firms were slow to implement remote working capabilities and quick to accept government subsidies, others were thriving and taking market share. Catherine Wood, Founder and CEO of ARK Invest explains,

“During tumultuous times, innovation takes off. It gains incredible market share. I've seen it one crisis after another. The forces in motion are going to accelerate.”

While online retail has been one of the most obvious winners in recent months, many other areas have stood to benefit too. Esports such as Formula 1 Esports and NBA 2K Live have seen big boosts to their viewership as traditional sports have been offline.

In this Q&A, Cathie explains some of the headwinds and tailwinds faced by different sectors, and why a slower recovery could further benefit innovative companies.

How do you think this current crisis compares to others? Is 2008-2009, really the right comparison?

Well, I don't think so. Let me step back and tell you what I don't think this is, and what I do think it is in terms of these comparisons. Many people in our industry are worried about an outright depression because of some of the crazy numbers we're seeing.

I don't think this is the next Great Depression. Back then, in the late 20s, we were seeing monetary policy and fiscal policy tightening. They just kept tightening and did not see what was about to happen when tariffs were enacted. We are not tightening monetary policy and we are not tightening fiscal policy. Except for China, we are taking tariffs down right now. This is very different to the Great Depression era.

This is not a systemic financial crisis like the GFC, where we thought banks would fail. The Fed and the ECB were not moving fast enough back then, until the crisis was upon us. Then everybody agreed what actually was happening when Lehman went bust.

This crisis was triggered by a health issue, not some kind of underlying economic crisis. It's a shock to the system. It's much more like September 11th, 2001 and October 1987. In '87, we went down almost 25% in one day. That was a shock. But when we think back to that time, we did very little in terms of government policy in reacting to it. And the economy proceeded a pace.

In '01, we were in the middle of the tech and telecom bust and 9/11 was another shock. There was a little bit of government intervention, but not much.

This time, if we had done much less, we would be better off. There are all kinds of incentives not to work right now. So the next few months, the growth is going to be hit hard. We're going down and it will be hard, but there are backstops.

So, I don't think that there's a depression. We had one of the strongest economies that we have had in quite some time. I think if we didn't muck it up with these interventions as much, that would have continued. I believe we're going to have a much better recovery because of our starting point. Businesses have spent 18 months cutting back while consumers were doing fine. Inventories and capital spending had already been cut back.

I believe that President Trump will pivot towards this payroll tax holiday until next year. If he does, I think the V-shape is going to come back into people's thinking. If he doesn't, I still think we're going to recover. There's so much innovation taking place and competitive dynamics in motion, that many businesses and individuals are going to use this crisis as an opportunity to move to the head of the line.

As a result of that intervention, what sectors or economies do you believe are now most vulnerable in this time of COVID-19?

During tumultuous times, innovation takes off. It gains incredible market share. I've seen it one crisis after another. The forces in motion are going to accelerate. So, we know that streaming has taken off, that's going to become more and more of a problem for traditional broadcasting and cable.

Many people are surprised to learn that online retail in the United States is still less than 15% of total retail. That is going to change map dramatically. It already has. Once people understand how easy it is and how much more selection there is online, I think there's going to be a much faster shift online in terms of retail.

In media, one of the interesting phenomena is esports. Traditional sports have been shut down. Esports are taking off and we're seeing simulated basketball (NBA 2K Live), NASCAR races and Formula 1. The first NBA2K Live, Phoenix Suns had almost as many people viewing online than they have at every game.

Energy has clearly been disrupted. We have been very negative on energy for a long time due to what is happening at the margin - electric vehicles are taking share from traditional gas-powered cars and demand is continuing to disappoint. That has now accelerated. We're going to see huge cutbacks. We're already seeing it in capital spending. I think we’ll see huge volatility in the oil prices until things settle out. Maybe $20 to $40. $20 doesn't surprise us. The oil cartel is broken and this has accelerated it. I wouldn't be surprised (this is a personal prediction) to see oil prices go back into the $10 - $12 range, which was where the cartel took it initially.

Industrials must embrace a much quicker turn manufacturing, bringing manufacturing closer to home – e.g. 3D printing for spare parts. I think robots are going to increasingly infiltrate the industrial world. Social distancing is an excuse right now, but I think it's going to accelerate. If you force employers to pay their employees not to work and they realise that is a new risk, they'll think twice about adding that marginal worker and perhaps will consider adding robots instead.

Healthcare will be transformed. Traditional pharma companies will be able to repurpose their existing libraries of drugs, which provides an obvious benefit. Telemedicine is taking off and this has accelerated that trend. We’re improving DNA sequencing so we can better understand diseases. All of these are going to see increased investment.

And finally, financial services, our own industry. One of the first things we learned was that cash is a virus super-spreader. There are so many transactions still taking place with cash – I think it's still 80% in the United States – that is going to change. In our view, this will benefit the mobile payments and digital wallet providers like Square and PayPal.

Do you think markets have hit a low point, or do you think that we will have further setbacks?

I think a lot of people are looking at '87 to inform the answer to this question. On ‘Black Monday’ in October '87 there was a 25% drop in the market, and we bounced for another couple of months. We actually hit a new low. Technicians use the past to inform their thinking about the future. I think many expect us to retest, which could very well happen. We hit a climax in the VIX, which was higher at the close than we saw in ‘08-‘09. I don't think we're going back there.

We've got two very important indicators that the financial system is not seizing up. Carnival Cruise and Yum! Brands, both of which had been at the epicentre of what has taken place, and they completed bond issues that were four to five times oversubscribed. So much so that they were able to upsize the offering and cut the interest rate. That's a huge proof point that the markets are working, they are not seizing up. That's one thing that is different from ‘08-‘09.

We've seen liquidity being pumped into the system, not only in the United States, but globally. Do you think that that liquidity is going to continue to work? And are you afraid that this is going to unleash inflation throughout the system?

We learned a lot from ‘08-‘09. The reason the meltdown happened was the velocity of money went down. That means you could pump a lot of money into the system and individuals and corporations would hold it. I think many people expected the same this time. In the early days of this, it will be. However, given the fiscal policies that have been unleashed, there will be a lot of unproductive activity. Typically, in the early stages of a rebound, productivity picks up, output per man hour picks up. So you'll have this counterforce. Productivity is one of the greatest forces against inflation. It won't be as powerful this time as it was before. We probably are going to see more inflation, not this year, but in the next few years than most people are expecting now.

I think many people are responding to what has just happened as a repeat of ‘08-‘09. They think the same thing's going to happen afterwards. Central bank balance sheets are growing enormously, not just in the United States, but around the world. That kindling is what ultimately we could see lit by bank loans. Then we would see the velocity of money starting to pick up. If people fear inflation, then they'll speed up their activity and the velocity of money will continue to increase. So, I'm not as complacent about it. I feared inflation after ‘08-‘09, that was wrong. So, I'm a little bit on guard now that everybody's so complacent this time around.

If the economy really has entered a longer term recession, how does ARK respond?

We know that innovation is going to gain a lot more traction because of what has happened a lot sooner than we thought.

If there's a prolonged recession that will be ever more true. Better, cheaper, faster, more productive, more creative products and services to salvage revenue growth. My conviction there is very high.

We've been in a world where benchmark-style investing has been all the rage and it accelerated in the last few years. Those benchmarks are harbouring a lot of value traps, a lot of companies that are cheap because they're going to be disrupted. They're in harm's way. At some point that the indexes are going to start delivering really subpar results and that innovation will do much better.

Recently, algorithms being driven by high frequency traders were doing was looking for low cash buffers and cash burn situations. They didn't care what it was. They totally torpedoed 2U (NSDQ: TWOU), which is an online education company. That’s a solution to the problem! It's getting business hand over fist from its partners, the colleges and universities who need to get their schools back online, their students back in class. They are going to be funded, but the algorithms didn't care about that. The stock went from around $30 down to $11.50 in two weeks. It just didn't make any sense. A lot of this type of mindless quant behaviour has been giving us great opportunities.

Could you tell us about the tailwinds for innovation you see in this crisis, what we’re seeing and where they're happening today?

You can summarise a lot of them by saying we are all working digitally now. The acceleration towards the digital world just got a huge booster shot. Anyone involved with infrastructure, anyone who's able to evolve their business strategy and is able to develop an online presence, they're going to have even more opportunities going forward. So, I think there are a lot of tailwinds.

I mentioned almost every sector is being impacted by this, which gets me to another point. Technology is permeating every sector. It is blurring the lines between and among sectors. That's the reason that research is set up so incorrectly right now to be able to capitalise on innovation. Every analyst must be a technology analyst now. In the traditional world, an industrial analyst would cover a carmaker like Tesla. But this is our problem with Tesla. People don’t understand what the company is; it’s not an auto company. I know Jim Chanos said he thinks it's an auto company, but we don’t think so. It's a robotics company, an AI company, it's a software as a service company, autonomous taxi network company. Auto analysts don't know what to do with that. Our analysts do. They're collaborating because we're set up by platform. The five platforms that we're talking about are:

  1. DNA sequencing,
  2. Robotics,
  3. Energy storage,
  4. Artificial intelligence, and
  5. Blockchain technology.

They're all evolving at the same time and they comprise about 14 technologies. Those platforms are converging. So not only is technology permeating every sector, but the platforms are converging. So if you do not have a collaborative, iterative research effort, you're not going to win. That's why we set up ARK this way.

Not everyone sees the next big thing coming

The Nikko AM ARK Global Disruptive Innovation Fund offers access to a global equity portfolio that provides thematic exposure to disruptive innovation. The Fund seeks to capture long-term capital growth by capitalising on changing trends caused by technology-enabled innovations like genomics, robotics and next generation internet. For more information hit the contact button below.

Nikko Asset Management Australia is pleased to bring the ARK Investment Management strategies and capabilities to Australia. ARK Investment Management is a Nikko Asset Management strategic partner. This material is issued in Australia by Nikko AM Limited ABN 99 003 376 252, AFSL 237563.

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Managing Editor
Livewire Markets

Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.


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