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Editor's Note: Hamish Risk | November 11, 2020
post-covid secular themes Structural disruption Pennock Idea Hub
1. The Vaccine and digital disruption; A new dawn – welcome to the roaring twentiesBarbara Gray of the Pennock Idea Hub is a specialist on global industry disruption having published several books: “Secrets of the Amazon 2.0”, “Secrets of the Amazon” and “Ubernomics,” based on her extensive research. We’ve been following her prolific work particularly closely in 2020 as she has pieced together accelerating structural disruption trends during the pandemic, and then turning them into actionable investment ideas using her proprietary Value Pyramid strategic framework. These ideas were published in ”The three ghosts haunting the new twilight economy” in July and ”Watch Out for the Tech Giant Tsunami” in late September where she argued that the global economy was entering a new cyber age that would widen the distance between the “haves” and the “have-nots”, with the coronavirus creating a digital abyss that attacked companies stuck on the wrong side, while the digital world was thriving. She argued that the pandemic effectively delivered two-year’s worth of digital transformation in just two months and has chronicled the firms and sectors that are likely benefit from the way consumers priorities have changed. The news this week of the discovery of a vaccine obviously requires some recalibration of her thesis and Gray has responded quickly with a new report this week, entitled ”A New Dawn.” The report heralds the end of the Twilight Economy and the start of the New Roaring Twenties, a new phase that will create an acute shift in both societal and corporate behaviour, once again changing the value equation of her Value Pyramid framework. For instance Gray writes that value origination will bounce back from scarcity to abundance, and once consumers no longer have to worry about meeting base functional physiological and safety needs, they can then focus on satisfying their pent-up higher-order emotional desires for love/belonging and esteem, hence the reference of the ”New Roaring Twenties.” One other key point the report makes is that digitalisation is already past the point of no return. Value capture has already taken a permanent quantum leap across the digital divide, with the pandemic acting as a catalyst to speed up companies’ adoption of AI and the cloud, and so she believes digital platforms will continue to accelerate while the sharing economy roars back to life. Indeed, among Gray’s key investment ideas is that tech giants are still positioned to expand their total available market, and she believes they will start to make strategic acquisitions of physical assets to capitalise on the New Roaring Twenties. If you’re interested in this report or would like to organise an initial call with Gray, click the link below.
Asset allocation Global liquidity Cross Border Capital
2. The debt/liquidity spiral; How much further could global liquidity expand in 2021?Financial markets are spinning around a fragile debt/ liquidity axis that is vulnerable to rising credit risk and higher inflation, says Michael Howell at CrossBorder Capital.
He says policymakers can cushion credit risk but, in doing so, their liquidity injections risk creating monetary inflation. Added to that, the Baby Bust and the Great China Decoupling are raising the stakes by increasing cost inflation and forcing savings ratios to skid lower, says Howell. Even with these threats on the horizon, he says 2021 may still be a decent investment year, however. According to Howell, if, in the long term, financial assets will surely struggle to cope, much as they did in the inflationary 1970s, until then they will get a boost as stocks massively outperform bonds. He says after the gains enjoyed through 2020, many investors are wary of further equity market gains, but they should not be, and not least because of the huge increase in supplies of ‘safe assets’, notably the US$6 trillion jump in world central bank liquidity. Seen in this light, Howell says from an asset allocation point-of-view, equities are becoming relatively scarce investments. Indeed, he says equities look far better than bonds, with gold and Bitcoin sound alternatives, adding investors should enjoy the party – but dance near the door.
post-COVID stimulus US equities Renaissance Macro Research
3. Equities ”thrusting” ahead, but not without trip wiresJeffrey de Graaf at Renaissance Macro Research has issued a note highlighting the potential stumbling blocks for equities following the sharp rally sparked by Pfizer’s announcement of a potential coronavirus vaccine. He points out that the news pushed the number of stocks hitting 20-day highs to 72%, only the tenth time since 1957 that readings have exceeded 70%. The so-called “deGraaf Thrust Indication” is an indicator he developed himself, and history suggests it is unambiguously bullish, following on from a reading in June which signified the worst of the bear market was over. De Graaf says while the vaccine news is undoubtedly great news for mankind, there are some potential trip wires for equities, however. First, he says vaccines are notoriously hard to vet for efficacy, and at 90% Pfizer’s reading is probably the best that can be hoped for, leaving plenty of room for disappointment as immunisation programmes are developed. The second trip wire, says de Graaf, is the reluctance of monetary and fiscal authorities to provide the stimulative nourishment to which the market has become accustomed. As he points out, when news was bad, the market rallied on hopes of Fed action, but when the news gets good, the counter effect of stimulus withdrawal is likely to have the opposite effect.
Rates US Treasuries HSBC
4. Reset US rates longs on this weaknessSteven Major from HSBC maintains his well established ”lower for longer” rates view in the wake of the recent weakness in US Treasuries arguing that the recent correction higher in bond yields is an opportunity to reset bullish positions, favouring 30-year Treasuries. Ultimately what matters to bond yields is the path of short rates, and this is unlikely to be significantly changed by near-term optimism regarding a vaccine, Major writes. These shifts reflect his range-trading approach to the lower-for-longer rates backdrop implied by the Fed’s recent policy switch, with his new yield forecasts now meaningfully below the forwards and consensus. HSBC updated end-2021 and end-2022 forecasts are 75bp. This new 2021 forecast is 25bp lower than their previous level. Worth noting that these new forecasts are in the middle of the 50-100bp range, with the 2021 forecast 20bp below spot, 40bp below the Bloomberg average and 45bp below the forward. The 2022 forecast is 80bp below the Bloomberg average and 65bp below the forward.
Emerging markets High-yield credit Ned Davis Research
5. Upgrading High Yield and EMLast week Joe Kalish from Ned Davis Research noted that credit was at a critical juncture, with several indicators at long-term inflection points. A lot can happen in a week. The apparent resolution to the U.S. elections and some positive news on the vaccine front, has led Kalish to now upgrade risky areas of credit to join the firms overweight on investment grade credit in the U.S. and globally. The rationale is that with the VIX falling, and small caps rising (implying promising vaccine results could boost economic growth prospects for 2021 and beyond) are positive drivers for high-yield. One key indicator that NDR tracks is the Wells Fargo diversified business development index, made up of firms that provide direct financing to small enterprises, which Kalish says is on the cusp of giving the “all clear” signal. Meantime, in EM, NDR’s indicators point to breakdowns in spreads, and also seeing breakouts relative to the Global Agg and the U.S. Agg indices.