06 mai 2020

Re-thinking international opportunities in a post Covid-19 world

by Gareth Whiley, Managing Partner, Silverfleet Capital

Surges in protectionist sentiment and increasing tariffs in recent years, as evidenced by the US-China trade war and the likely consequences of Brexit, have meant that ‘frictionless’ international trade was under threat long before the current crisis.

With Covid-19, these threats have only intensified - certainly in the short term, with real fears that barriers to international trade could be in place for the longer term. The crisis has quickly exposed the vulnerabilities of our integrated world, closing borders and disrupting many supply chains that we have taken for granted. This perceived weakness of globalisation is likely to play to the wider political agenda of those who want to encourage protectionism.

The pandemic has exposed the limitations of many domestic economies to manufacture certain goods, including medical equipment and pharmaceuticals. In the near term it is clear that some domestic firms and industries, who are able to adapt, will benefit and grow from this increased local demand.

However, it is also clear what inefficiencies would arise if every country tried to become individually self-sufficient in every sector. Skills and resources are never credibly going to be purely domestic – it would take decades to achieve. What is likely, however, is that there will be an increased strategic focus, government-led, on sufficient domestic capacity in key industrial areas to prevent dependence on others: in effect, a return to a form of central industrial strategy.

In conjunction with a renewed focus on strategic autonomy in selected areas, it is likely that the political mood may also increase tariffs and protectionist moves more generally. This is unfortunate as history shows that international competition and international trade encourages economic development and growth, and international experience and insight are crucial to navigating our rapidly changing world. But these lessons will likely need to be relearned through experience rather than theory.

From an investment point of view, there will likely be two points of focus: short-term opportunities brought about by innovative companies and entrepreneurs able to meet rising domestic (or regional) demand for goods and services in the context of Covid-19; and in the longer term – to look beyond the current, albeit profound, disruption and understand what ‘normal’ might be like once again and what opportunities this presents.

We believe that international opportunities will continue to arise and that international trade will be crucial to the revival of the world economy. Opportunities will present themselves in all our key sectors – healthcare; services; consumer and manufacturing – but the rate and form of recovery will vary widely. For example, industries where large numbers of people are required to come together or move across borders, such as tourism and leisure, will naturally experience severe disruptions for longer than most.

We see great potential in software-enabled services that can be employed remotely. Technology has been one of the stand-out success stories of the past three months, helping keep many large and small businesses working. Our focus is on finding opportunities within our core sectors where the application of technology can help differentiate and accelerate growth almost whatever the new normal might look like.

In addition, as the international movement of goods resumes – even if subject to tariffs – manufacturing and healthcare products will remain key areas of interest for us.

We believe international trade will continue and that international growth opportunities for companies will remain. The rules and dynamics however will continue to change as they have done through the years, maybe now with an increased degree of volatility. We have been helping our portfolio companies to expand internationally for over 30 years and our network of five European offices, combined with our current portfolio’s operations in 30 countries globally, continues to give us a unique perspective on how to navigate these shifting waters.

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