Asset AllocationJune 26, 2023

Who Will Be Long-Term Post-Pandemic Investment Winners?

Companies that achieved tech advantages (such as Microsoft) and pricing power (John Deere) will triumph, says JPM’s Jared Gross.

Reported by Larry Light

It’s no secret that COVID-19 disrupted the economy, hastening trends that were already building. But what companies stand to come out ahead long-term as a result of the pandemic-induced changes—and should be good bets for investors?

The answer: businesses that positioned themselves to benefit from the movement to the cloud and those that harnessed new technology to achieve better pricing power. This is the conclusion from a broad study of how the pandemic altered the economy by J.P. Morgan Asset Management. The principal beneficiaries, it predicts, range from tech giant Microsoft to farm equipment maker John Deere.

The report, “The Post-COVID World Comes Into Focus,” outlines how government fiscal outlays have expanded, moving the U.S. and other nations into an industrial policy previously shunned (example: Washington’s huge new program to boost domestic chip production). Other changes: a “re-wiring” of international trade toward a multi-polar system to minimize China’s influence and aging populations in developed countries that hasten dependence on new technology to overcome labor shortages.

“Government is playing a more critical role in the economy” than before, says the study’s main author, Jared Gross, the firm’s head of institutional portfolio strategy, in an interview. The U.S. economy has evolved so that there now is a “fiscal put,” with the federal government surpassing the Federal Reserve’s prominence, born of the need for government outlays to combat the pandemic, he says.

Nonetheless, he adds, the government’s industrial policy “is not picking winners at the company level,” but rather altering the landscape via subsidies and tax breaks so that the strongest players emerging from the virus’ economic disruption can grow even more important in the future.

What might some of those well-positioned companies be?

The study highlights Microsoft for its strong position in cloud computing. Second only to Amazon, Microsoft’s cloud revenue has been expanding more quickly than the e-commerce megalith since the pandemic’s onset. Cloud infrastructure—computing, networking and storage—monetizes data, the amount of which doubles globally every 18 to 24 months, the report notes. “Data growth is not constrained” as are volumes of physical goods such as TVs and smartphones, Gross observes.

Artificial intelligence is another of Microsoft’s advantages, the report found. The company is the lead investor in OpenAI, the developer of the top generative AI app.

Another company on JPM’s winners’ list is Infosys, an Indian IT service provider. “It facilitates the transition” of businesses to the cloud and other digital services, Gross says. Revenue growth was between 5% and 10% annually before COVID, then ballooned to 20% before falling back to its current 15%.

A third leader whose tech prowess has catapulted its revenue is Mercado Libre Inc., the biggest e-retailer in Latin America, which was founded in 1999 in Argentina and now has offices throughout South and Central America. “They have first-mover advantage there,” Gross says, comparing its rise to that of Amazon. The company continually adds more capabilities, including advertising and lending.

The JPM study also spotlighted two other companies that have used technology to spring-load their returns: Old Dominion Freight Line, which specializes in small-quantity shipments (known as less-than-truckload), and Deere & Co., doing business as John Deere, the farm-equipment maker. Old Dominion has honed its logistical expertise and so has been able to escalate its prices. Deere has also improved its pricing power by furnishing farmers with data on where and how to plant their crops to get better yields.

Since pandemic lows in early 2020, these five companies have enjoyed rapid stock appreciation, doubling or tripling. Those performances beat that of the S&P 500, up 1.7 times since then.

To Gross, “These companies have better positioning and will see higher revenue and profitability.”