Parts of the United States and the rest of the world are tentatively moving towards re-opening their economies; many unknowns remain about the path forward, including the timeline for developing treatments and producing vaccines, as well as many other issues, observes Monty Guild in Guild Investment Management's Global Market Commentary.
Many unknowns remain about the path forward, including the timeline for developing treatments and producing vaccines, as well as many other issues.
Those unknowns collectively are making it impossible for many companies to offer guidance about future revenue and profit trends, and that makes it difficult for investors to gauge the near-term stock market outlook — particularly in the context of unprecedented support being lent to markets and economies by central banks and fiscal authorities.
With all that said, however, it is still important to do some top-level thinking about the potentially enduring effects of the pandemic on prospects for various businesses, industries, and economic sectors. Certainly, the pandemic will leave a changed world in its wake, and whatever the uncertainties, investors must prepare for that world. It is a time of uncertainty, but definitely not a time for complacency.
Some industries will be winners. The obvious winners so far: internet; cloud; biopharmaceuticals; software and hardware technologies that facilitate remote work and collaboration; delivery services; online retail; food retailers; pharmacies and related businesses; and deep-discount retailers.
Some economies will broadly be winners. Relations between the United States and China will continue to be strained or become more so. The vulnerability and fragility of supply chains will hasten the ongoing reassessment of the past few decades of globalization. Reshoring will bring business back to North America from Asia, and within Asia, potentially benefit countries outside China.
Some ongoing themes of transformation in technology will likely accelerate, for example, the decarbonization of the world’s energy infrastructure, new energy storage technologies, and electric transportation. Of course, very cheap fossil fuels will create a countervailing incentive for continued hydrocarbon energy use in many areas.
Some businesses and industries which have been sharply affected by measures to combat the pandemic will recover — though in some cases that recovery will be slow. We’re thinking here of old-line brick-and-mortar retail, full-service restaurants, fitness, travel, and probably many others. The pandemic may create psychological effects in some consumers that will take time to overcome even when the crisis has passed.
Some industries and institutions will be permanently changed. Higher education will accelerate its shift to internet-based delivery and may never fully return to the old status quo. This will put universities under pressure to fill their housing.
Occupancy may decline for office space if some workers who have now transitioned to remote collaboration never return fully to their old commuting patterns.
On a geopolitical level, the reorganization of supply chains may sharpen fault lines among the world’s great power blocs — as countries realize that dependency on untrustworthy counterparties runs contrary to their own long-term interests. Particularly, there is a possibility that China’s historical willingness to engage in economic misbehavior may solidify their status as a pariah among open global societies.
Countries may realize that trust and shared values are actually a critical element for robust supply chains — and not just the ability to “deliver the goods” cheaply. It may turn out that low prices can conceal high costs of a different order. The ramifications of such a shift would imply a profound restructuring of global economics.
Although the big stock indices have rebounded sharply from their lows, the average company has recovered much less robustly. That is to say, it is the big tech leaders that have once again led the charge — in part for reasons mentioned above, that they are significantly more exposed to economic themes that may be strengthened by the pandemic.
The stocks of companies in the financial sector, and income-yielding stocks, have lagged; we believe they will recover more robustly as it becomes clear which ones will survive, thrive, and maintain and grow their dividends in the new post-pandemic environment.
All in all, it would make sense at this juncture for the market to move sideways or give back some of its recent gains.
There will be bankruptcies — especially in the energy sector, the retail sector, and the travel, personal services and restaurant industries, as the long-term trends we pointed out above are accelerated by the pandemic and the recession it has spawned.
Airlines, cruise lines, and auto companies will probably be partially owned by governmen, or have obligations to repay government loans before paying dividends to their shareholders.
Oil — A few years ago, the United States was producing about half as much oil as it was producing in February 2020. This was because of a boom in oil and natural gas production from shale.
The U.S. was at or near energy self-sufficiency for the first time in many years. This gave the U.S. economic power and military protection against encroachments by unfriendly foreign powers.
A few weeks ago, Saudi and Russia teamed up in an attempt to destroy a common enemy: the U.S. shale industry. (Saudi got the added bonus of hurting another enemy, Iran.
Although Russia has supported Iran in some respects, suffice it to say that that support is not a deep-rooted commitment, and Russia was content to see Iran hurt as a byproduct of this attack on one of their real enemies.)
On average, U.S. shale production needs $40 or $50 oil to be profitable. If OPEC and Russia can push the price of oil down and keep it down, many shale producers will go bankrupt and the industry may face a prolonged recovery.
Saudi and Russia themselves can withstand the stress of low oil prices for a while even though they depend on the commodity economically.
Saudi will spend down its balance sheet; and Russia will pass the damage through to its unfortunate and long-suffering people by permitting its currency to decline, as it always does.
Through these different strategies, Saudi and Russia could maintain the pressure for a few years. Additionally, Russia and China, two long-term potential U.S. enemies, prefer to face a U.S. which is vulnerable to the threat of oil import disruption.
Where we believe they miscalculate is in their failure to grasp the benefits of a dynamic and free economy. Capitalism has a mechanism for dealing with disruptions of this kind.
Smaller and weaker companies will go bankrupt; bigger and financially stronger companies will buy up their assets at a discount. Technical innovation will proceed; production costs will continue to fall; and eventually those assets will be online and producing again — while OPEC and Russia have much more limited capacity to maintain the pressure.
In the near-term, the oil price war will benefits China and India, who will see their energy costs drop for a time.
Gold — We note that several major brokerage houses have come out with analysis that raises their long-term price objective for gold. It is all a bit of crystal-ball gazing at this point, of course. Our view in brief is that we see powerful near-term deflationary forces that could keep gold in check.
We also see the potential for ongoing dollar strength in a world economy which is deeply and structurally short dollars and is being squeezed. Still, gold could rally in the near term even with those forces at work.
In the long term, given the unprecedented nature of the counter-pandemic fiscal and monetary interventions, we are very bullish on gold.
