Crises are trend accelerators. Mater artium necessitas – “Necessity is the Mother of Invention”. For centuries crises have been catalysts for innovation. Today is no exception.
As active investment managers, identifying and understanding shifting trends is an important catalyst for uncovering great investment opportunities. Bottom-up company analysis is built upon identifying relative winners and losers in an ever-shifting landscape. Whether you’re speaking with an investment client or you’re an investor yourself, you can expect to hear more about these trends and how they’re playing out in stock markets and the world at large. This article features the top six trends we’re currently watching.
We are built for change.
COVID-19 has meant big change – whether we like it or not. What’s important to remember is that even a crisis can’t change basic human characteristics. And not all change is necessarily bad. Human beings are adaptable – we’re built for change. It’s how we have survived and thrived on this planet for thousands of years. Hopefully some of the beneficial changes, such as more frequent hand washing, will stick with us for longer.
- We are social creatures. Mother Nature equipped us with an exceptional ability to both remember and to forget. And we’re particularly gifted at forgetting things that hurt, scare or make us uncomfortable once the threat is no longer present.
- We are resilient explorers. When we remember the September 11 terror attacks and the post-attack views toward travel, we were nervous, scared and unsure. Then, things changed, and we slowly went back to travelling again. Our perception of the threat dramatically declined (whether based on fact or fiction), helped along the way by new cumbersome and costly security measures, and eventually people travelled in greater numbers than ever before.
- We are innovators. Problems are simply situations in need of solutions – and you’re perfect for the job! Capitalism, via entrepreneurs and innovators, has always been an excellent problem solver. In fact, each advisor-client relationship is built on the premise that we can tailor, adapt and innovate solutions to new and unique scenarios on an individual level.
Trend #1 – a new trend
We are now in a ‘safety first’ world.
Safety protocols have always existed in modern society; however, for the most part, the primary focus was on delivering the product or service. That isn’t going to cut it today. Now every company is a safety company first and the details of whatever product or service that’s provided comes second. Security will come at a cost, either in terms of time, money or perhaps the level of service, but it’s also a way for the innovative and creative to gain a competitive advantage. Will your choice of hotel or airline be the one with the lowest price or best location? Perhaps not if they haven’t convinced you they are the cleanest. New technologies, faster adoption of existing technologies (online check-in and keyless hotel room entry come to mind) and additional or retooled staff and resources will be key factors to earning your business. Likewise, the advice business will be the same – it will be both ‘how’ and ‘what’ advice that will be paramount. Those who can offer both in ways that make clients feel comfortable and confident will win.
Trend #2 – a hyper-accelerating trend
Home is where the heart is.
Some trends that have been hyper-accelerated are obvious. Anything digital wins (i.e., streamed, purchased or enabled from home): work from home, home office supplies, home comfort, e-commerce, e-retailing and virtual everything – from birthdays to family gatherings, conferences and meetings from one-on-one to the thousands. Online retailing has become a necessity – not a luxury – for every business today. We’ve already seen e-commerce (non-store retailers as per the U.S. Census Bureau’s definition) witness a massive uptick as a share of retail sales.
Stock markets have been quick to seek out the potential beneficiaries. Baskets of stocks (affectionately referred to as ‘COVID plays’) that include companies that provide or enable working from home, technology, video streaming, online retail, cloud computing/data storage and semiconductors have been outperforming.
While Amazon and Shopify steal all the headlines, the list of outperforming stocks also includes select discretionary leisure stocks that would normally be very weak under recessionary conditions (think of consumer products such as RVs, Seadoos, snowmobiles and ATVs). Investors see the appeal of leisure activities that are allowed to be done privately or in isolation. The share prices of RV makers Thor Industries and Winnebago are up 209% and 212% respectively from their March lows; shares of Canada’s BRP, while still down 16% from their highs, have rebounded 66% from their recent lows. With public facilities closed and/or unappealing, and people spending more time at home, it’s home comforts and close-to-home outdoor living that’s gaining ground. Shares of U.S.-based Pool Corporation (purveyor of all things pool and backyard living, with 375 locations worldwide) have made fresh all-time highs post COVID and sit up 19% on the year.
Unfortunately, not everyone will be a winner under these scenarios – including those industries that take you away from home. Airlines and hotels are at risk because both leisure and business travel will likely be slow to come back from their 2020 peaks: Marriott International shares remain down 39%, American Airlines off 45%, and Air Canada down 63%.
Trend #3 – an uncertain trend
What about the proverbial ‘home away from home’?
What happens to office real estate values will take time to discern. Working from home has passed the critical tipping point, perhaps leading to softer demand for office space. On the other hand, for those who do return to offices, space constraints will need to be managed. Keeping people apart leads to greater demand for space. Overall, offices and office design will need to adapt going forward. From office design to HVAC and furniture, all these considerations will need to adapt to the ‘new norms’ of social distancing and government health protocols. And from that, new opportunities will emerge. Those creative enough to seize upon those opportunities will experience a surge in growth.
Trend #4 – a retreating trend
A retreat from globalization (already well underway) is set to accelerate, with policies now shifting back toward domestic priorities.
Think about the move toward onshoring, near-shoring and supply chain restructuring. After decades of free trade and pro-globalization views, shifting global trade, protectionist trade agreements and trade diversification (all trends that began before COVID) are ever more present in today’s critical supplies/suppliers and national security narrative, and those intricacies are now evermore elevated.
Today, we see nations turning inward. While the virus knows no borders and global cooperation is viewed as key to combatting the disease, more and more countries appear to be taking a “me first” attitude. Consider recent comments from French Finance Minister Bruno Le Maire: "We have to decrease our dependence on a couple of large powers, in particular China, for the supply of certain products" and "strengthen our sovereignty in strategic value chains like cars, aerospace and medicines.”
These shifts have important ramifications for businesses:
- Industries that benefitted from open borders and globalization will face headwinds. Gone are the days when companies could concentrate the majority of their production activities in low-cost regions with little regard for borders or distance.
- Businesses will need to build in resiliency, flexibility and redundancy strategies as well. Processes like these are both expensive and time-consuming. After decades of outsourcing, simply understanding your supply chain (let alone securing it) can be a daunting task. Large multinational manufacturing companies, such as car or airplane makers, can have 5,000 tier-one suppliers. If each of those has an average of 250 tier-two suppliers, the original company has 1.25 million suppliers.
- These challenges bring opportunity. Onshoring will deliver fresh (but maybe just old) opportunities for businesses to fill the gaps. The result could lead to increased economic activity as businesses invest to adapt and an increased need for labour to implement the new processes.
Trend #5 – a capital discipline trend
Share buybacks and dividend increases under the microscope.
The prospect of higher taxes looms and already high debt loads have increased to bridge the lockdown. Debt loads are mitigated, to some extent, by historically low interest costs. But the ability to add on debt for the purpose of share buybacks and dividend increases will be dampened as balance sheets are already tapped and costs (from trend #4) and tax burdens potentially rise. Indeed, the social appetite for such balance sheet alchemy is being called into question as these mechanisms are increasingly being frowned upon.
- Voices, including Democratic presidential candidate Joe Biden, tweeting: “I am calling on every CEO in America to publicly commit now to not buying back their company’s stock over the course of the next year.”
- U.K. banks have suspended dividends at the encouragement of the Bank of England.
- In the U.S., Germany and France, recipients of government aid packages are restricted from issuing dividends (as well as share buybacks in the U.S.).
- In Canada, bank regulator OFSI spelled out in a March memo that “OSFI has set the expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being”. This language is carefully chosen to say, “dividend increases”. (Don’t be concerned, while never a guarantee, we don’t expect dividend reductions from the Canadian banks, either voluntarily or through regulation.)
Share buybacks have been an important source of demand for equities (i.e., increasing stock prices) over the past decade. In fact, some studies have suggested that since the Great Financial Crisis (GFC), much of the upside for the S&P 500 has been fueled by trillions of dollars of corporate share repurchases. If you remove this ability, you also remove an important source of support for equity prices.
Trend #6 – a worrying trend
Government bailouts can’t last forever.
As society looks to government for temporary assistance in this time of crisis, we need to be mindful that the unprecedented government intervention in the economy stays temporary. Like all crises, COVID-19 will pass and, given the opportunity, a fresh wave of business energy, innovation and adaptation will be unleashed. It is all far more powerful when it isn’t stifled by a permanently supersized government that fosters moral hazard and coddles zombie firms and industries. This risks restraining the ‘creative destruction’ so vital to give rise to innovation and entrepreneurship (as argued by famed by 20th century Austrian-American economist Joseph Schumpeter) will launch new technologies, remake existing industries and give birth to entirely new ones – all of which will set in motion future economic growth.
Where do we go from here?
Crises accelerate trends, but they’re catalysts for change and innovation.
We are already seeing business failures; the stronger companies will survive; their ingenuity will be an even greater advantage. Change, while uncomfortable, does not have to be necessarily negative. Capitalism and entrepreneurs have always been excellent problem solvers and innovators; capitalism will be part of the solution going forward. Capital markets are at the heart of capitalism, investing matches those with excess savings with those who need capital to invest. Active investment managers like GLC, employing our expertise, rigorous research and disciplined processes are an important ingredient in the proper functioning of capital markets. Our goal is finding profitable opportunities; we do this by allocating capital efficiently and effectively. The profit incentives behind this capital deployment are an important driver of risk taking, innovation and growth that benefits both investors and society as a whole.All figures as of June 12, 2020; source: Bloomberg.
Copyright 2020 GLC. You may not reproduce, distribute, or otherwise use any of this article without the prior written consent of GLC Asset Management Group Ltd. (GLC).
This commentary represents GLC’s views at the date of publication, which are subject to change without notice. Furthermore, there can be no assurance that any trends described in this material will continue or that forecasts will occur; economic and market conditions change frequently. This commentary is intended as a general source of information and is not intended to be a solicitation to buy or sell specific investments, nor tax or legal advice. Before making any investment decision, prospective investors should carefully review the relevant offering documents and seek input from their advisor.