6 Predictions For a Brave New World

• Proliferation of deep tech & cloud makes financial transactions faster
• Sunset for traditional unicorns, sunrise for a new set of unicorns

Hopes for a Covid-19 vaccination are at least 18 months away. And, we are already seeing early signs of the second wave in countries that opened too fast. The world is no longer hopeful of a V-shape economic recovery with 'old-normal' being reinstated anytime soon. The world economy is gearing for a predicted 3% contraction for 2020, the worst since the Great Depression. In response, repurposing, innovation and improvisation are indeed the needs of the hour for companies – to explore new growth options from new lockdown behaviors.

Will there be a silver lining? Will it lead to a brave new world?

It is useful to recall that some of today’s giants had been born of adversity: Google from the dot-com bust in early 2000 and AirBnB from the 2008 crisis. Here are the six changes envisioned in six months – a prospect for a "brave new world.”

#1 - Emergence of Covid-19 bond, a better investment than a startup

Government resources will be stretched in the war against Covid-19. More than 100 countries have asked the IMF for help. Foreign investors have withdrawn over US$100 billion from emerging market bonds over concerns of uncertainty and volatility.

African Development Bank’s “Fight Covid-19” bond launched last month has been over-subscribed. The 3 year maturity bond has so far raised US$3 billion from central banks, bank treasuries and asset managers. It aims to alleviate the impact of Covid-19 on Africa’s economies and livelihoods.

Is there scope for Covid-19 bonds to be made available even to institutional/high net worth individual buyers? Similar to US government’s war bonds issued during World War II to finance military expenditure, they could be zero coupon tax-free bonds, at a discount say of 25% redeemable in three tranches after 2025.

#2 - Emergence of cashless economy, signals near end of physical cash

Over 90% of restaurants’ businesses today are off-premise. Menu items are discounted 30%-50%. Delivery apps have slashed commissions.

Over 5% of Malaysia’s restaurants may close within the next 30 days, while around 5% have permanently shut down their restaurants. Restaurants’ revenue loss has topped RM105 million in the first four-week MCO period, with over 1 million paying jobs to be lost by mid-June, unless the government provides relief. A new idea, contactless dining, allows you to enjoy restaurant’s ambience, yet maintain social distancing, avoid touching bills or menus.

#3 - Proliferation of deep technologies and the cloud

Trading volumes via fintech apps and digital platforms have increased 25% in March alone compared to 2019, due to Covid-induced market volatility. Over half of new sign ups on trading apps are under age 34 - a sign, Deloitte says, of “a new generation of investors in today’s market.”

Before Covid-induced surge, fintech startups were struggling for attention from prospective users. Aussie trading app Stake welcomed 20,000 new sign ups in Q1’20. Canadian fintech app WealthSimple is now acquiring on average 7,000 new users per week.

Deep tech makes financial transactions faster, more efficient and simpler, with high potential to impact functioning of financial markets. Fintech apps reduce cost of service, helping people in less affluent parts of the market become economically viable.

Increase in use of deep technology will be accompanied by increase in accompanying infrastructure. In the largest single investment in cloud history, Alibaba has announced plans to invest US$28.29 billion in cloud infrastructure, amid rising usage of services due to the pandemic.

#4 - Repurposing shared spaces to meet the demand for cloud kitchens

Covid-19 will make co-working spaces a thing of the past. Malaysia currently has a total of 21.84 million sq m of office space. But co-working made commercial occupancy rates drop around 3% YoY in the last three years: the going rate of a hotdesk rental in KL Sentral is less than RM30 per hour. Will Covid-19 make it drop faster, or disappear altogether?

Abandoned shared spaces call food entrepreneurs to repurpose them as virtual kitchens – centralized commercial food production facilities, where one or dozens of restaurants rent space, to prepare delivery-optimized menu items. Such kitchens may also offer driver parking, driver waiting areas (with screens to monitor order times) and check-in stations for seamless driver pick-up.

GrabKitchen, Foodpanda, Deliveroo, and Smart City Kitchens are gearing up for unprecedented growth in Southeast Asian markets. Covid-19 may likely double Asia’s online food delivery segment’s CAGR of 8%.

#5 - Sunset for traditional unicorns and sunrise for a new set of unicorns

Rosy futures of unicorns are clouded by Covid-19. Media reports indicate that iFlix has delayed an IPO planned for Q3 on the Australian Securities Exchange. But, will-writing startups, dating apps, telemedicine, edtech, fitness apps, remote working apps are doing well. Movie ticket apps, concert booking apps, tourism apps are suffering. A new UK-based startup, Epiderm, was recently launched to track employee and visitor contact through check-ins and calendar analysis.

Startups that do not adapt to new shifts in consumer behavior will perish. An example is Quibi, a video streaming start up that optimises short clips for to view on small smartphone screens. It targeted millennial viewers during long commutes or in physical queues. Now disinterest in mobile-only content, due to social distancing, leaves it to perish in competition with other subscription video on demand players like from Netflix, Amazon. Or pivot to TV.

Private equity firms will make vast fortunes through purchase of distressed assets. Venture capital firms (and returns) are relatively isolated from market volatility. Yet a recession gives them more leverage in value appreciation in financial technology startups (for digital payment, lending, credit evaluation), SaaS for productivity and deep technology (BI, AI). 3.5 million Covid-19 cases and 250,000 deaths have increased interest in life sciences. Investment opportunities are more attractive in vaccine development, not just for SARS-COV-2 but subsequent others.

Malaysia alone may go from 1 unicorn (Khazanah’s brainchild, Xeraya, is the only active PE & VC firm in Malaysia that focuses on life science investments) to 5 in 2020.

#6 - Rise of green transport and renewable energy

The fall in commuting and air travel has led to collapse in oil prices: from 2019 average of US$60 per barrel to US$14-US$20 per barrel. But renewable energy is expected to grow by 5% to make up almost 30% of the world’s demand for electricity in 2020. Even pre- Covid-19, the global electric vehicle charging station market was forecast to grow at a CAGR between 40%- 48% in 2019.

Auto firms may focus on production of small electronic vehicles, as more people look for alternative to public transport. India-based car makers, Japan’s Toyota and South Korea’s Hyundai have halted all production. Car production in Europe and North America is 50%-70% lower YoY. This is threatening to also plunge metal and petrochemical requirements.

In fact, economic recovery overall may be of a greener nature than in the aftermath of the 2008 crisis where China, US and South Korea contributed most. Citizens’ demand for strategic government action for a climate change as part of Covid-19 recovery is strong, as reflected in two Ipsos surveys across emerging and developed countries in April.

“Back to Normal” is no more. What options do we have to #FlattentheCurve?

There are three. First, allow herd immunity to develop: Very few like Taiwan, Sweden, South Korea were able to flatten the curve, without a lockdown or a collapse of the public health care system.

But this approach will be disastrous for the emerging world, absent success factors of those countries (eg. 20% Swedes live alone, excellent public health care, availability of mass testing in South Korea, Taipei’s open data information-sharing strategy and widespread monitoring of potential patients, etc).

Second, mitigation: lock down the most vulnerable and allow the majority to “return to normal.” The UK was criticized for this approach, as it threatens to overwhelm a nation's healthcare system.

Third, suppression: continue the lockdown at cost to the economy, until there are near- zero new cases. Only China has successfully managed virus suppression with a lockdown (now lifted with stringent measures); and before the second wave from lockdown lift: Singapore and Hong Kong.

The global biotech community is running 66 programs with three approaches to the exit strategy ie. a vaccine. But it cannot be rushed. We must choose option three: continue the lockdown, while building new normal to help the economy function. According to scientists, transmission will quickly rebound if interventions are relaxed even temporarily.

Dr. Gabriel Leung, an infectious disease epidemiologist and dean of medicine at the University of Hong Kong says we must prepare for a marathon with no definite end, rather than a sprint of six months. Then the only way to survive this marathon is to build an appetite for re-purposing and innovation.

It is time to embrace a brave new world.

Gayan Koralage is Director - Group Strategy, edotco group.