Investing in the ‘masked economy’
With the worst of The Great Lockdown (TGL) market crash likely behind us, investors should prepare for the next phase of the pandemic era — a reopening of the world economy.
Looking back, this year's market action has been epic. The Covid-19 crash has been exceptional not just in the severity of the market's decline — about 34 per cent from the February 19 high to the March 23 low — but also by its speed. The US stock market fell into a 20 per cent bear market in the shortest time ever, just 22 days before falling a further ten per cent in a record 30 days. However, almost as stunning as the sell-off has been the market's swift recovery over the past few weeks, ranking second best of all time and trailing only the move immediately off the 2009 market lows.
Because of the lockdown, economists are expecting a steep global recession with US gross domestic product falling dramatically in the second quarter. In fact, Wall Street brokerages seem to be in competition for the most dismal second-quarter outlook. With US GDP contraction predictions ranging from -10 per cent to -45 per cent, a popular Barron's editor recently quipped the race is on for the grossest domestic product forecast!
Regardless of the final numbers printed for this year's first half GDP decline, what lies ahead may be more important. Scenarios for an impending recovery are being represented by an alphabet-soup of letters including a “V” shaped recovery which would be the best-case outcome, a “U” shaped recovery taking a longer time, or the dreaded “L”, which means the economy is down for the count. A “W” scenario implies a head fake rebound followed by another downturn, perhaps instigated by a second wave of the virus.
My best guess is for an elongated “U”, but with a more immediate uptick this summer. Initially, we can expect a sudden bump in activity as pent up demand comes back online with the reopening. However, this short-term boost will likely be followed by a long, drawn out recovery as millions of displaced workers and small businesses struggle to regain their footing. Future demand will also be tempered by both mandatory and self -imposed social distancing for many months or even years to come.
While the TGL recession feels personal, we must remember that equity markets are forward looking. What matters most for stock prices now is the timing and strength of the economic rebound in this year's second half and into 2021. While lower interest rates engineered by central banks around the world are helpful, stocks require earnings which in turn require meaningful economic progress.
As the Covid-19 epicentre shifted to New York City, one of the more defining moments of this recession has been New York governor, Andrew Cuomo's executive order last month requiring everyone in the state to wear a mask in public. Social distancing will thus define this historic era and perhaps we can name it, the “masked economy”.
Lacking a viable vaccine, social distancing will impose limits on our business and personal lives. While we continue to live in the age of disruption, a new chapter has begun. Technology-enabled behemoths such as Amazon and Netflix have already disrupted the retail and media sectors in a big way, but they will become even stronger in the masked economy. Prior to the pandemic, Amazon had been systematically taking market share away from brick and mortar retailers, but the largest e-commerce retailer is now poised to crush them further. While about 30 million Americans filed for unemployment in the past few weeks, Amazon hired 100,000 new employees. The strong will become stronger in the new world order.
Besides the ongoing disruption currently under way, the need for social distancing will continue to alter our work, academic, family and travel planning behaviours. Get ready for explosive growth in the emerging “tele-world”: tele-health, telecommuting, teleconferencing and telelearning will stay with us long after the crisis passes.
Cautiousness will be another hallmark of the masked economy. After mass layoffs, consumers have been shaken to the core while businesses have witnessed the harsh reality that the Government has the right to close them down at any time. Clearly, the costs and risks of doing business have risen and lending standards must therefore become more stringent. Even though world governments are permitting a gradual restart, social distancing will linger around much longer. Initially, consumers will be reluctant to spend vigorously or perhaps even go out in public.
In the world of commerce, face-to-face interactions will be less common and large conferences could stay on hold or may be confined to smaller gatherings. Business travel will be crimped by both health concerns and smaller budgets. Many enterprises are likely to stay with newly established video meetings versus in person meetings. Handshakes? No, thanks.
On the political front, expect the trend towards nationalism to accelerate. America had already commenced reshoring its manufacturing sector in response to last year's trade wars and now the pandemic will accelerate the process. US politicians will likely see a “Made in America” agenda as a way to help re-employ over 30 million newly laid-off workers. Despite the established fact that intelligent globalisation actually helps almost all countries, the message will be lost to fears over perceived domestic job sustainability.
In physical retailing, activity will be slower than before as customers visits are staggered and human interaction more limited. Infrared thermometers are already being used to check employees' health at Walmart and Amazon and may be used on customers, too. The most vulnerable sectors are restaurants, retail stores, shopping malls, theme parks and sports stadiums.
However, some of the worst casualties will continue to be the airlines, cruise companies, hotels, casinos and energy companies as travel is curtailed for some time to come.
Even after the worst of the pandemic passes, new and unexpected outbreaks may occur in various hotspots. Expect governments to act swiftly to deploy standard lockdown procedures in order to contain the spread. However, they will be more prepared than before. Parts of both the US and Europe are reopening, however a “start-and-stop” economy is possible if a new virus wave is identified.
As I stated here earlier this year, selectivity is the key to navigating the volatile risk markets in 2020. While unprecedented government stimulus has so far prevented a repeat of the Great Depression, the landscape remains less than ideal for many sectors. Winners and losers will emerge from the rubble and investors must be diligent.
• Bryan Dooley, CFA is the Senior Portfolio Manager and general manager of LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority