If 2020 has taught us anything, it’s that it is incredibly difficult, even impossible, to predict the future correctly. If you had told me at the beginning of 2020 that we will experience one of the worst crashes in 2020 and the S&P 500 would still be up around 16% for the year, I would have totally dismissed that prediction, but that is what happened in 2020. Even though the S&P 500 experienced its fastest-ever 35% drop in 5 weeks in March, it recovered to finish up 16% for the year. However, what’s the fun in writing an investing blog when you don’t make predictions because investing is all about the future. It doesn’t matter what a business has done in the past, it’s all about what the future holds and how that business will perform in the future. So, in this post, I make 5 predictions about the businesses and the stock market for 2021 and beyond. Here we go:
- Digital Transformation: Even though the Covid-19 pandemic proved disastrous for some businesses in 2020, it has paved the way for digital transformation. It does not matter what kind of business it is, be it airlines, restaurants, manufacturing companies, retailers etc. The companies that have invested heavily in technology and have transformed themselves into serving customers with the help of technology in this new digital age will survive and even thrive. Think digital menus for restaurants, online check-ins for airlines, apps for ordering online, managing reward points etc. Companies were already investing in technology for their business even before the pandemic. The Covid-19 has accelerated the investment into digital transformation exponentially. So, my first prediction is that this trend of heavy investments into technology will not only continue but also grow substantially. In my portfolio, I am trying to identify the pick-and-shovel companies that other businesses will use to invest in their technology and helping them move into the cloud. The companies that I have invested in this space are Crowdstrike, DataDog and Okta.
- Decline of Physical Retail and Increase in E-Commerce: One sector that has benefited tremendously from Covid-19 is e-commerce. This is a trend that was already growing at a steady rate (see figure below), but Covid-19 has pulled some of the growth forward and helped some of the companies in this sector grow at triple-digit growth rates. Due to the pandemic, a large segment of the population tried buying online for the first time. There was a seismic shift in the buying behavior of the public. Some people who bought anything online for the first time discovered the convenience of that process instead of going to a physical store, returned to make several online purchases. On the other hand, there were at least 29 retail bankruptcies in 2020. You can see the list here. Going through this list, you will notice that most of the names on this list were already losing business to the online merchants and these businesses invested very little or almost nothing in their digital infrastructure that led to their bankruptcies. So, my second prediction is that e-commerce will occupy an even higher proportion of the total sales going forward and will grow at an even faster pace in 2021 and beyond. The companies that I have invested in this space are Etsy and MercadoLibre.
- Rise of Fintech: When was the last time you paid for anything in cash? You don’t remember. Me neither. More and more people are moving towards digital payments. The rise of apps such as Venmo, PayPal, Square Cash App, Apple Pay is growing at an unprecedented pace. For example, at the start of 2020, PayPal had predicted that they will grow by 35 million net new accounts. At the end of 2020, the number of net new accounts added by PayPal was about 70 million net new accounts, so almost double their prediction. If you think that they have already grown too much and cannot grow further, follow the numbers. Even now, the money that is moving through PayPal or Square is a tiny portion of the money that changes hands globally. The U.S. is pretty advanced and most of the population in the U.S. has access to the banking system and therefore can use these platforms. If you follow this story internationally, you will see a different trend. For example, in Latin America, more than half of the population does not have access to the traditional banking system, so a payment app called Mercado Pago by MercadoLibre is growing at an exponential pace. In Southeast Asia, Sea Money just received a digital banking license in Singapore and that company serves a population that is almost twice the size of the U.S. So, my third prediction is this trend of moving from cash to digital payments will accelerate at a faster pace and I am invested in these companies that are leaders in this market.
- Telemedicine: One area that experienced exponential growth in 2020 is telemedicine. Consider this statistic: 11,000 members of Medicare received telehealth services in the week ending March 7, 2020. The number of Medicare members who received telehealth services in the week ending April 18, 2020: 1,300,000. That is a growth of 11,718%. That is an astonishing growth rate. This is how it looks in graphical form: Granted that this growth was entirely due to Covid-19 pandemic. However, like e-commerce, the pandemic has helped accelerate this growth and this will have an ongoing effect on the people who want to see a doctor. Many people who used telehealth service for the first time due to the pandemic will experience the convenience and will keep using telemedicine for non-essential visits. In fact, this study found that telemedicine saves over 100 minutes of patient’s time compared to an in-person visit. Moreover, due to the pandemic, the U.S. Department of Health & Human Services (HHS) has made it easier for doctors to provide telehealth services and allowed more flexibility for reimbursement of telehealth visits. My thesis is that when life goes back to the new normal once the pandemic is over, people who tried telemedicine for the first time will not be reluctant to use telehealth again for non-essential visits. Some of this growth will stick and people will use telemedicine for non-essential visits that do not require an in-person visit. Therefore, I am invested in Teladoc, Zoom and Twilio to take advantage of this shift.
- Volatility: My last prediction is that in 2021, the stock prices will go up and go down. But If you dollar-cost average into a S&P 500 index fund during 2021 on a monthly or semi-monthly basis, my prediction is that you will be up about 10% at the end of the year. So, set a fixed sum of money and invest that into a S&P 500 index fund on a set date every month or every two weeks.
Even though the headline for this article says predictions for 2021, my predictions are for next five years at least. I am looking long-term and the next 12 months is an arbitrary number. I see these changes playing out over the next five years or even the next decade. So I could very well be wrong in all of these predictions for 2021. You may be wondering that all the predictions that I made in this article are pretty straight-forward and you did not gain anything by reading this article. But sometimes, we miss landmark changes happening right in front of our eyes. I reserve the right to be spectacularly wrong on all the predictions. I will write an article at the end of 2021 looking back at this article. Of all the predictions that I made in this post, I am most hopeful on the last one because I have history on my side. In fact, I am doing just that. Every two weeks when I get my paycheck, I dollar-cost average into a S&P 500 index fund (FXAIX) so regardless of what happens during the year, I will be buying shares of this index fund every two weeks. What do you think about these predictions? Do you agree? Disagree? Did I miss a trend that you think will grow in 2021 and beyond. Feel free to write in the comments below.