HyperNormalTimes

Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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November 15, 2020

Reset Time – not a return to Go

Nothing has changed, but nothing’s the same, and every tomorrow could be yesterday. (David Byrne)

Resets Everywhere -

The last couple of weeks seems to be witness to a major global reset. We have a new President elect, a vaccine for Covid19 and not to be left out, a changing of the Praetorian Guard at No 10. Particularly if you subscribe to the view that the latter power shift is a precursor to a Brexit trade deal, then 2021 looks, in many important ways, like a watershed. Taking these briefly in turn I think some things will continue much the same, but others will change, albeit maybe temporarily.

Some Things Remain -

Joe Biden will be inaugurated as US president on January 20th. He is unlikely (even after the Georgia Senate runoff in the same month) to preside over a Democrat clean sweep of both houses. This limits his effectiveness and the degree to which he can pivot US policy. However, in many regards things are unlikely to change that much anyway. In the critical geopolitical struggle to contain China, Biden is not going to change much. Further, the EU isn’t exactly rolling out the welcome mat for him. Choosing this week to impose 25% retaliatory import tariffs on US goods such as ketchup and sweet potatoes for subsidies the US government gives to Boeing and threatening to fine Amazon £15bn for monopoly abuses, looks at least like poor diplomatic timing and at worst like self serving EU protectionism. Visibly attacking two of his country’s most successful companies will not go unnoticed to an old time Democrat pork barreler like Joe Biden. Maybe this was why Boris was higher up Biden’s call list than everyone thought.

Printer Still Goes Brrrrh -

So international relations and trade policy issues will at least linger, but what of the economy and the prospects for monetary and fiscal policy? Here again, there doesn’t really seem to be any new thinking from the Biden camp. The fact remains that the financial legacy of lockdown needs to be financed. Other than speeding up the introduction of MMT (what Jim Rogers describes as More Money Today) policies and enforcing the implementation of negative rates, there are aren’t any other new tools in the box. Monetary and fiscal stimulus will remain the order of the day, albeit the White House’s relationship with the Fed is likely to become more conventional, so there is scope for presentational differences from the outgoing regime.

Poles Flipped -

The biggest reset event has been the news of the Pfizer vaccine. This one event has caused the financial world to experience the the equivalent of polarity reversal. While there remain good reasons that the path of this particular vaccine to save the whole planet will still be blocked, with more than ten other vaccines in phase 3 trials, it is very much odds on that this event has signalled the beginning of the end of lockdown as an accepted policy to cope with Covid19. The time it takes for the world to fully pivot towards this prevailing view is still far from certain, but the course seems set. From a British national perspective maybe the second mouse gets the cheese and the Oxford Astrazeneca vaccine proves the ultimate winner, a real boost to the UK’s post Brexit global pretensions.

New Boris -

Finally in the UK we have the prospect of a reset of Boris Johnson. We don’t really know how much of this drama is pure internal No 10 infighting, the desire to make a compromise with Tory backbenchers, or with the EU on a trade deal, or most likely, a bit of everything. What seems clear is that Johnson wants to develop a new softer more consensual style. It’s as if he has seen the writing on the wall from the US election and is keen to put away his populist clothes with his single minded getting Brexit done mantra. We don’t know how this plays out, but it feels risky for his own personal survival, but also probably necessary. With Starmer playing a steady Eddie, long game in opposition, and Boris moving into the more consensual middle ground of Westminster politics, it looks like a set up for a a new era of Butskellism. Less of an ideological battle but more an argument over technocratic competence, hence why I think this is a risky path for Boris to take.

Meanwhile in Markets -

So where does this all leave the investment landscape? There is much talk of the switch from growth to value. I am not sure this is necessarily an accurate or enduring explanation for the pivot that is actually happening. What is true is that those sectors and stocks that have performed poorly year to date, in areas like travel, hospitality, retail, have seen sharp recoveries, and broadly related to the extent of their underperformance to date. For airlines, gyms pubs and retailers this has obvious logic. These are generally “value” laden sectors (they are cheaply rated), they have been sold off and out favour as lockdown threatened their existence. The prospect of a vaccine removes a lot of this radical uncertainty, however it doesn’t remove the financial uncertainty particularly in sectors where the new normal is not an analogue of 2019.

Reset Not Return -

Take the acceleration to online grocery shopping. Ocado has been a clear winner of the pandemic (and yet might save M&S too). The traditional supermarkets have had to invest heavily in their online capacities to retain market share. However, even after a lockdown ends part of this share has been lost to low cost competition forever, and remember Amazon hasn’t even begun its full scale assault on this market in the UK yet. Similarly, online musical instrument supplier, Gear4Music and white goods supplier AO World will not lose the incremental share they have racked up year to date from offline competition. One reason for this is that many of their independent competition will not have survived lockdown. So while there has been a one off event driven revaluation of certain sectors, this doesn’t necessarily mean value stocks are going to reverse their poor showing of the past 20 years. There is likely to be more to go for in the shares of Rolls Royce, IAG, Gym Group, Cineworld and Lloyds Bank, but this is still more of a reset than a complete reversal of fortune.

Old Models Will Still Die -

Despite the attention from the DoJ, the EU and the impact of the vaccine, Google parent Alphabet has still managed to reach an all time high share price this week. Its dominance of online advertising remains compelling whether we are in lockdown or not. Whatever ITVs perceived resilience and ability for reinvention, Google and Facebook look set to benefit most in a post lockdown recovery of global ad spend. Banks might see lower levels of loan losses as a result of an end to lockdown, however, the structural threats to this outdated layer of financial intermediation have increased, and are not going away. More significantly the monetary policies of asset purchase programmes and fiscal stimulation of deficit financing, MMT and UBI if anything will be driven faster and further, threatening to undermine confidence in bond markets and currencies. The need for inflation protection has definitely gone up a notch or three. The existence of analogue money and clearing banks remains in doubt.

Tactical Changes -

Having missed the first stage of the event driven reset of the lockdown losers, I have taken the tactical precaution of selling down some of my overweight big technology exposure and taken some lockdown winner profits. The next stage is to buy some increased exposure to long term winners that have been brought lower by the lockdown, started to recover, but still have further to travel. My watch list currently includes: WHSmith, Booking.com, and Airbnb (IPO due to be announced imminently), as travel plays; 4imprint, as a proven long term winner in US promotional products; Square, as a long term winner in the digitisation of money; Springfield Property (Scottish housebuilder) as a small but dependable play on the UK leveling up and spread of regional UK home ownership; and Plus500 as a play on the continuation of market volatility and its ability to continue to grow share of the CFD market.

Healthy Mindset -

One area of the market where I feel in need  of better understanding and potentially greater exposure, is healthcare. The Pfizer vaccine and in particular the technological triumph of the mRNA methodology that it seems to indicate looks like a game changer for our understanding and use of gene editing for immunology. I am ratcheting up my reading in this area. A couple of decent picks and shovels plays, like Abcam, would be ideal.

Migration Helps Everyone -

The other thing that the BioNtech vaccine story vindicates is the unqualified benefit that migration plays to the advancement of humanity. The Turkish German couple who mobilised their knowledge in mRNA, developed in the battle against cancer and quickly applied to the new area of respiratory disease, is an outstanding act of innovative critical thinking. It is a useful reminder of the powerful stimulant to the way we use our knowledge when people cross borders and adapt to new cultures. A warning of the risk the world takes by moving away from globalisation.

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