Which trends will change after the COVID-19 crisis? 

 

The world is in the middle of an economic recession triggered by the Coronavirus. The health crisis (more than 860k deaths and more than 25 million positive cases) and the economic crisis (surge in unemployment) are both being addressed using every means possible in the short term. Although somewhat premature, it is worth considering the potential long-term effects of COVID-19 – not least knowing, as investors, that markets always try to respond prospectively. 

 

Under normal circumstances, we only change our behaviour slowly and imperceptibly, but in times of crisis, things that would normally take a long time change quickly because we simply have to act. When the crisis is over and the dust settles, we usually return to our old habits, but some things may have been changed for a long time (a few things permanently), and these are the things we try to address here. 

 

People: “Caution and social distancing (SD)” 

 

Caution. The COVID-19 crisis will make people more cautious. It may sound like a given that the COVID-19 crisis is essentially a matter of life or death. While the world has usually overcome most health crises, and fears will subside, a couple of factors may prolong the cautious behaviour: 

 

The result may therefore be increased consumer savings. In the aftermath of the Global Financial Crisis, we saw an increase in private savings. The effect may not be as great this time because savings levels are already high and consumers are in a better financial position. 

 

Social distancing (SD) 

 

Social distancing will gradually fade and probably disappear fully within five years. 

 

Health policies and conduct during the COVID-19 crisis have focused on SD (and proper hand hygiene) as the most effective way of reducing the risk of becoming infected. 

 

However, people are social beings and become unhappy, unhealthy and underperform if they live and work all by themselves all the time. That tells us SD is likely to gradually wither and die within the next five years. Obviously, some norms may change in the business community such as the handshake. However, the handshake has been with us for thousands of years and has been considered an expression of faith and good intentions although people in Asia use alternative greetings that do not involve touching. 

 

Businesses: “Resilience” 

 

Businesses will consider whether their setups are strong enough to cope with the next great shock. The key word in business communities will therefore be “resilience”. If some of the initiatives taken prove to also boost productivity, they will become more attractive for businesses to maintain. Possible initiatives to consider: 

 

Building greater resilience requires investment, and large businesses may well have an advantage in terms of creating alternative brick-and-mortar locations, diversified supply chains and a full-scale work-from-home technology. 

 

Reduced globalisation may increase overall costs for businesses, but that will be the insurance premium they pay to be more resilient to external shocks. More automation may then be the factor that can help them reduce their cost level again. 

 

Service businesses will boost their online capacity. Online doctors, online solicitors, online consultants – online everything.  

 

With respect to brick-and-mortar locations, should businesses always aim to have their head office in large cities, even if these cities have plenty of well-educated labour? This is probably difficult to avoid if we think of Silicon Valley as the hub of IT companies and New York/London as financial hubs. That would indicate that the advantages are too great to consider moving out of the large cities. 

 

Furthermore, creativity, innovation and knowledge-sharing still depend on personal cooperation, making face-to-face cooperation indispensable in the foreseeable future. Another factor is the cross-functional working environment where ideas are shared during informal “coffee machine meetings”, which would seem difficult to transfer to the digital working environment. 

 

Sectors: Opportunities and challenges 

 

Who are the winners and losers after COVID-19? Themes like online interaction, readiness to face the next great crisis and health-based protection represent the common denominator in many of the opportunities (marked in green) and challenges (marked in red):

 

- Information Technology

• Online/virtual/digital services and infrastructure in health monitoring, business back-up, education, entertainment and medical diagnosis 

• Privacy data, monitoring, data security, reduced demand for car sharing and online travel

 

- Healthcare

• Permanent increase in healthcare services to prepare for the second wave of COVID-19 or the next Disease X. Reduced political pressure on the sector after “heroic stories”. 

• Reduced demand for long-term nursing facilities due to social distancing. 

• Communication Services 

• Permanent increase in digital interaction, entertainment and gaming.

 

- Consumer Cyclicals 

• Boost in shift to online retail sales

 

- Aviation 

• Border restrictions, SD on airplanes, consumer caution until vaccine is available. Businesses increase their use of video meetings instead of physical business trips. For example, German airline company Lufthansa expects to use only 47% of its plane capacity in 2021 and that the figure will not exceed 85% until in 2023, according to Handelsblatt. As part of the process, Lufthansa also expects to sell 100 of their 760 airplanes. 

 

- Business property 

• More people working from home to boost the robustness of company resources reduces the need for office property.

 

- Energy 

• Reduced air travel and cruise ship business. Reduced commuting due to distance working. Road traffic accounts for 50% of global oil demand, aviation for 8%. 

 

- Automotive 

• Reduced demand due to distance working and possible travel restrictions.

 

- Hotel, restaurants, tourism 

• Fewer business travellers and private trips (largest fall for international trips) and a shift towards online entertainment and take-away food. 

 

If we consider IT, Healthcare and Communication Services as the long-term winning sectors, it naturally follows that US equities in the long run are most attractive because the three sectors account for 52% of the equity market value in the US, against 26% in the eurozone and 33% in Japan and EM. In the near term, the problem is that the US market is one of the most expensive equity markets worldwide. However, one should always be cautious about dismissing long-term, well established trends. An example of this is that air traffic continued to rise both after the 9/11 terrorist attacks in New York and after the Global Financial Crisis. 

Tax Exempt Pension Contributions

If a self-employed person doesn't make a contribution into a pension plan by the tax deadline the tax relief that year is lost. If a company owner doesn't pay money into their pension fund before the end of the company tax year the company loses the tax relief for that year. Use it or lose it!

Estate Planning

Large amounts of estate tax can be saved by a little planning. Let's say your estate is worth €2 million and you have 2 children. Leave a million to each and there could be €200,000 of tax payable by each child. However, let's assume, you have 5 grandchildren. Leave them €32,500 each. Tax saved on €162,500. Use it or lose it!

Annual Gift Exemption

As an extension to Estate Planning have a look at this! - The annual small gift exemption provides the ability to pass on €3,000 tax free every calendar year. If it not used it by 31st December they lose it for this year. You and your wife/husband can each give each child €3,000 before the year end. Do the same for grandchildren and your son and daughter in laws, that's a total of €54,000 each year totally free of tax, magic. Use it or lose it!

Here we have a few simple examples of how making simple but decisive decisions in the area of tax planning can deliver substantial savings. Estate Planning, in particular, requires good advice and consultation. We would be delighted to assist you in this area in any way we can.

Income Protection Insurance is a type of protection cover which can help to safeguard your lifestyle, should you be unable to work for a period of time, due to illness or injury. It can assist in getting you back on your feet by providing you with a monthly income and ultimately help to maintain your quality of life.

If you ask most people what their biggest asset is, the chances are they'll tell you it's their home. But from the time you start earning a living, without doubt, your biggest asset is your income. So if you think your home is worth insuring, it stands to reason that your income is even more deserving of protection.

Determining the right level of cover for you

The first question you should ask yourself when considering Income Protection is how would you cope financially if you were unable to work due to illness or injury? Will you be able to pay your mortgage and other household bills? Will you be able to maintain your current lifestyle?

Consider your income

• If you are an employee or a company director some employers may pay you for a short period of time or a reduced income. Others may be more or less generous. You should check to see what sick pay arrangements your employer has in place for you.
• If you are self-employed, your business may continue to generate income in the short term although your long-term earnings are likely to be affected.
• You may be entitled to the State disability benefit. So ask yourself however - could you maintain your lifestyle on the State disability benefit? Probably not.
• In the short term, your savings may be able to provide you with replacement income, but how long will these last?

Consider your outgoings

• Most people will still have either mortgage or rent payments to make even though they cannot earn an income.
• Most likely you will still have usual household bills such as gas, electricity, telephone and food, but also personal expenses such as credit card or loan repayments. These will still need repaying should you be unable to work.
• Lifestyle costs - you can reduce some expenses, by cutting back on holidays and entertainment, but do you really want to economise on these?

Ideally, we would like to protect as much of our salary as possible, but if cost is an issue, remember that some cover is better than none. Most Income Protection policies are flexible allowing you to select your benefit level up to a maximum of 75% of your current earnings (less the State Disability if you are entitled to it).

Apart from the amount of cover you also need to consider when your benefit income should commence.  For example, you can choose from a range of deferred periods. In most instances this will depend on your employer’s arrangements. You also can choose for how long you would wish the income to last if your disability is a permanent one. Most will choose a period to the age at which you would be expecting to retire in normal circumstances.

Without doubt there is a need for Income Protection and that should be built into any Financial Plan so why not consider if you should be covered and please do get in contact to discuss this form of protection cover with us.