McMurtry Investment Report Newsletter – June 2020
June 2020 – Short- and Long-Term Economic Implications of Covid-19 pandemic
Pre- Pandemic
This pandemic has produced many enduring effects on our economy and how consumers behave. Before the virus hit overall economic growth In North America was quite strong and this reflected in the rising employment growth. Europe was still struggling but gradually improving nonetheless. The ongoing trade war between China and the US dampened global growth somewhat although it was not as catastrophic as many strategists predicted. However, any future escalation in the trade war could seriously cause some headwinds especially in certain industries like technology.
Global Lockdowns
China was the first country to lockdown its economy with the virus emanating from there. As a communist country the government demanded absolute compliance with the mandated lockdowns and penalized both companies and individuals that did not comply. The virus has certainly peaked in China and daily new cases and deaths remain at very low levels. This encouraged the government to reopen its economy.
The US was very slow on the mark closing down their economy. This resulted in both the total cumulative number of cases and the number of daily cases rising dramatically and far exceeding the rest of the world.
After several months of lockdowns, the US and Europe are gradually ending their lockdowns.
Trends during Lockdowns
The combination of government mandated lockdowns and social distancing, even between family members, resulted in a great deal of fear amongst consumers. In addition, a large percentage of the workforce were not asked to work from home, but were temporarily laid off. There have been all types of government benefits provided but many workers and small business owners were not even eligible for these payments.
The result is a consumer who is hesitant to spend on many things they used to in the past.
As a result of the lockdowns, consumers basically stopped travelling by all methods except by car. In addition, they stopped going out to eat and drink in restaurants and bars, preferring to order online for food and groceries. They stopped shopping in bricks and mortar stores, although they continued to purchase online.
In the midst of this pandemic certain industries and products benefitted. Companies like Amazon and Wal Mart, that have strong online presences, saw their revenues skyrocket. The increased demand for hand sanitizers and antiseptic sprays saw companies like Clorox greatly benefit.
While the basic ride sharing business of Uber has suffered, its subsidiary, Uber Eats has really benefitted from online demand for restaurant food.
Online videoconferencing companies like Zoom and Microsoft’s Team have seen very strong sales from this trend. Both Microsoft and Amazon and many other companies including Open Text and Intel have benefitted from the greater focus on cloud computing with so many workers working at home.
Companies like Netflix, Amazon, Apple, Comcast and Disney have seen a surge in revenues from streaming services with the demand for home online content expanding rapidly. Social media companies like Facebook and Google will continue to see their revenues climb with the increase in digital advertising.
Online gaming companies like Electronic Arts and Activision Blizzard have registered strong sales numbers with the high numbers of consumers staying at home.
The healthcare industry has also been a major beneficiary in this environment. Many drug companies like Gilead, Pfizer and Moderna have been either working on a vaccine or actively coming up with a list of both current and upcoming any-viral medications to control the spread of the virus. Roche has been approved for emergency use by the US government for its Covid-19 antibody test to determine if people have been infected. Abbott Labs has been approved for hospital use of its Covid-19 test.
Long Term Economic Implications
We do not know how long it will take before a vaccine is discovered and how effective it will be to eradicate the virus on a global basis. According to Dr. Fauci, it remains to be seen if any vaccine would last for an extended period of time to permanently stop the spread of this virus.
While ending the current lockdowns globally will greatly help the economy, there remains some long -term issues with the consumer and their ability to continue spending as they did on a pre pandemic basis. I expect that at least 25-30% of the population will either still be too afraid or simply won’t be able to afford to spend in the same manner they did in the past on travel, going out to restaurants and bars and shopping in bricks and mortar stores.
The lockdown trends of increased online shopping, gaming, social media, streaming, video conferencing and working from home should continue for a significant percentage of the population. Historically once consumers get used to doing things differently for an extended period, they are much more likely to continue doing the same thing.
Industries that will continue to benefit from these trends include Technology, Communications and Healthcare. In addition, the Covid-19 pandemic has given our youth even more incentive to focus on renewable energy and a clean environment with the Utilities industry a beneficiary.
Lastly a gradual resumption in overall global activity will lead to a pickup in cyclical industries like Financials, Energy, Base Metals and Industrials.
I would continue to avoid the hotel, cruise ship, airline and restaurant industries with a few exceptions like Restaurant Brands and McDonald’s. In the Reit sector I would continue to avoid retail and office ones.
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