Corona Virus Chronicle (XVI) - The End for Cash? Yet another reason to buy tech......
Updated: Jun 17, 2020
'Paying for goods electronically makes consumer life easier and if it stops transmitting bugs, then all the better.'
The End of “the Folding Stuff”– Yet Another Reason To Buy Tech?
Notes and coin are a physical representation money and “cash” is a portable means of conferring value from one person to another. Today, cash is comprised of paper or plastic notes and base metal coins. Cash changes over time in terms of physical design, appearance and even denomination. It is used for transacting in everyday items and is retrieved from bank accounts, through the use of ATM’s, gifted by a beloved Aunty or taken as change when purchasing goods. Notes and coin pass through many hands, purses, wallets and cash registers. Each banknote will be used in a few thousand transactions, last several years and be taken out of circulation by a bank when it is worn out. Coins last a lot longer, are involved in many more transactions and eventually end up in a piggy bank, down the back of a sofa or left collecting dust in a kitchen drawer.
Over the course of their lives, notes and coins will not only help transmit values but also Viruses. And so, in this Virus loaded age, the use of physical money has plummeted. It was already seeing a pretty rapid decline anyway, but shops are now only accepting electronic payments. Of course, as shopping is transforming from high street interaction to on-line clicking, the accelerated decline over the past few months has been unremarkable and electronic payment is here to stay.
It feels like cash is all cashed up. In some ways this is a good thing. Not having any jingling coin in your bags and pockets is liberating and when it comes to seeing where your money goes, the detail is on your bank statements. Paying for goods electronically makes consumer life easier and if it stops transmitting bugs, then all the better.
There is not doubt that technology has been a boon in developing cashless transactions. Years ago, before easy electronics, that banks generally decided high volume money transfer and transacting was a poor business for them, thus setting the wheels in motion for the advancement and introduction of payment specialists such as Mastercard and Paypal. These companies make money each time you use a card and their payment systems work seamlessly. They are now a commonplace part of our lives.
Declining use of physical cash means electronic payment specialists are becoming more profitable. It is yet another reason to own “Tech” as a sector. When you look at the share price of payment stocks over the past few months, they have been a clear winner. Paypal, is a company that is easily recognised as a payment specialist and it’s share price is up 40% year to date, such that it begs the question is it “expensive” as a stock? Well in basic traditional terms, yes, with a Forward Price to current Earnings ratio of 42x. However, with earnings appreciation of some 20% to 30% forecast into 2022, that rating is justifiable and combined with modest leverage, plus strong cashflow, it has been a winner all the way through the crisis. Unless an acquisition looms, eating up spare capital, it should continue to generate unencumbered free cashflow well into the future.
Interestingly, for us at SaSo, Paypal’s largest investor is Vanguard; owning 8% of it’s market capitalisation. The second largest is Blackrock with 6.4%.
So, from here people are going to keep money in the bank and use electronics to pay for everything, because, even the ice cream van will take a card.
Perhaps the only need for cash in this age of negative interest rates (it’s coming to our shores for certain) is as a store of value that doesn't attract bank charges and interest costs.
Time to stock up on safe manufacturers as well?
Head of Investments
SaSo Strategic Advisers
27th May 2020
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About the Author
Peter Smart, Head of Investments
Peter has been involved in investment markets since 1985, working within the private client areas of two global banks and for 22 years as the fixed income specialist for the UK Wealth manager, Brewin Dolphin. More recently Peter formed part of the investment team at bridport in Jersey specialising in the provision of specialist, income focussed portfolio’s.