Global Growth and Innovation Perspectives: May 2020
Monthly Newsletter May 2020
A bear market ‘fomo’ rally, or something more meaningful? Given the extent of the global rally with the S&P 500 having rallied 39% over the past 10 weeks almost without pause. This has only happened twice in the past 60 years, 1982 and 2009. Once again, the central bank put option appears to have saved the day.
We have been cautious of what feels like market irrationality in the face of the pandemic and have been watching some of the previously non-confirming indicators during this rally such as the cyclical sectors, long-dated yields and junk yield bonds.
However, we must ask; is it time to heed the message of the market? The most recent leg of this up move has been led by exactly these cyclical sectors (along with high yield debt). This is the market’s way of signalling they expect V shaped recovery.
Other factors in support of this economic recovery view that stand out:
- From the extreme lows of maximum lockdowns almost every data point should improve dramatically
- A more robust housing market than expected
- Significant inventory destocking (which will need to play catch up when demand recovers)
The recovery in the Chinese economy provides a useful framework for what we may see elsewhere. There are some sectors resembling a V while others remain in the doldrums.
The reality is that we will only know if the recovery was V-shaped over the next few months and whether too much optimism is being baked into the cake. Time will tell.
If we try and ‘backcast’ what the perfect V shaped recovery 3,6,9 months from now will have looked like … the following will have likely played out:
- There have been no unforeseen delays or setbacks in vaccine progress
- There has been no significant second wave of infections negatively impacting consumer behaviour
- Companies have rehired most if not all of those now unemployed (furloughed or retrenched)
- There have been no major individual or collective systemically damaging bankruptcies
- Consumer demand has returned to near normal levels beyond the initial pent-up demand release-valve
- The demand recovery is enough that there is no deflation while the low velocity of money keeps a lid on inflation
- 2021 corporate profits expectations at or near 2019 levels with no lasting Covid-19 impact
- Etc, etc, etc
Most of this is both plausible and possible, but is it collectively the most likely scenario? Is it most likely that we resume normal service by the end of 2020 (Path A) and global growth resumes on its previous trajectory?
We are not yet convinced but we are optimistic that the worst-case scenario has likely been averted. The other important point to acknowledge is that rising equity markets and record amounts of cheap money do go hand in hand, much as we have seen since the GFC.
The ECM GIF Portfolio
The Funds top performing sectors for the month of May:
- Cloud services
- Big-data and software
Many of our invested sectors have benefitted from virus and government induced changes. Our attention for the Fund is now focused on those areas where we expect the outsized benefits to continue without full reversion and also those areas where new trends and benefits will be established.
Looking ahead – Where do we see investment opportunities for the Fund?
Whether there is a V-shaped recovery or not, it is our job to look through the noise and short-term sector volatility. There are many and well covered trends such as cloud-based collaboration we have discussed previously. Below we touch briefly on some of our other expectations and where we see long term opportunity or growth in new technologies and innovations:
The post-pandemic corporate survivors will be more agile, more tech enabled, have a leaner cost base, and will have learned how to survive with fewer staff. In fact, these companies will likely have growing margins and may even be more profitable than before, at the expense of those who have not adapted as fast or have not survived. The key word being ‘survivors.’
Experience-hungry millennials whose savings rates have increased dramatically over the past few months will be quick to resume their social and spending habits (probably more so than older generations). Germany’s restaurant booking recovery points to this possibility.
Older generations have learnt some new tricks. The ecommerce, content on demand adoption of those previously slow to adopt (think parents and grandparents) is here to stay, from basic shopping and streaming movies to home buying and home DIY. This means a good deal of the benefits enjoyed by these companies will be long term in our view.
The push towards cashless transactions will continue to benefit leaders in cashless applications and fintech space.
Supply chain restructuring: Companies globally are rethinking the concentration risk of fully outsourced production (especially to the likes of China). Restructuring of the supply chain will accelerate several technological trends:
- A globally diverse supply-chain will drive sensor-based logistics and transport, coupled with blockchain authentication
- As more manufacturing is done locally, this will drive industrial and collaborative robotics as well as 3-D printing.
The risk of historically large debt and zero interest rates, along with debt monetisation has yet to be seen consequences. The quest for uncorrelated asset security and wealth protection could be supportive for ‘millennial gold’ in the form of crypto currencies such as Bitcoin.
Online services: we have all learned that not everything need to be done in person. Widespread adoption and sticky users are expected to continue to drive services such as online education and telemedicine.
In conclusion: while we are not chasing the markets rally, and we are unsure of the path the recovery will take, we nonetheless see exciting and investable secular growth opportunities over a 3 year time horizon.
Technology thought of the month:
Cyber security: Its well know that thanks to covid-19 there has been a significant increase in streaming, virtual meetings, online working, gaming, ecommerce, e-medicine etc. Massive amounts of new and confidential data is being generated every day and all of these services rely on trust by corporates and individuals that their data is secure.
There has been a 667% increase in spear-fishing e-mail attacks related to COVID-19 since the end of February alone. The global cybersecurity market will be worth $300B by 2024, according to Global Insights. This does not even include the cyber-insurance market.
Cybersecurity is one of the GIF Funds cornerstone investments.