What will the new economic ‘normal’ look like?

Michael Smith

Kauri Asset Management

As countries around the world slowly begin to ease lockdown measures, what impact will this have on the global economy and the appeal of different investment sectors throughout 2020?

With the global economy effectively in hibernation, the mounting impact of rising unemployment, diminished spending and lower manufacturing activity is beginning to be felt by governments around the world.

A sense of increasing urgency is now sweeping over many nations. Governments are now realising that they must restart their economies or potentially face even greater long-term consequences arising from the fallout of COVID-19.

However, despite all the best intentions, we believe many nations will struggle to find an immediate economic uplift that they may have come to expect.

We maintain the view that in the near-term, the new economic ‘normal’ will be a shadow of itself. This is likely to weigh on the broader global economy and dampen the prospects of a ‘V-shape’ recovery.

It is our view that any sense of economic ‘normality’ may take at least 18 to 24 months to play out. However, notwithstanding macroeconomic challenges, we believe some areas of the economy will fare better than others.

In fact, we strongly believe that changes to the composition of the near-term economy will create numerous opportunities for investors to take advantage of.

Where to invest in 2020?

One of the key areas we see benefitting in the near-term and beyond is the technology sector.

We have previously vocalised our bullish outlook towards payments processing companies, with consumers likely to favour online shopping and avoid cash transactions in favour of digital payment methods. This is a tailwind that we see benefitting the likes of Visa (V), Mastercard (MA), PayPal (PYPL), as well as local BNPL juggernaut Afterpay (APT).

Companies that make it easier to work or conduct business remotely are among those we think will be pivotal to an increasing trend of working from home, even after the pandemic subsides. ServiceNow (NOW) and Atlassian (TEAM) are two of our long-term bullish picks in this space, but we also like others such as Slack Technologies (WORK) and Zoom Video Communications (ZM).

As we believe people will be more likely to spend a greater proportion of their free time at home, we also see a lift in data consumption. Local data centre operator NEXTDC (NXT) is positioned to benefit from this, as is Telstra (TLS) courtesy of the 5G rollout. Meanwhile, international streaming service providers such as Netflix (NFLX) and Roku (ROKU) also have exposure to subscriber growth they can leverage over the long-term.

Looking slightly further out, infrastructure is a segment that we view as likely to be in the sights of governments around the world to kick-start their economies. Transurban (TCL) is one business looking to buy or fund new toll roads, however, broader construction activity could have positive implications for companies such as Lend Lease (LLC) and Cimic Group (CIM).

Consumer staples is another area where we think investors could see upside if seeking defensive exposure. Supermarket operators like Woolworths (WOW), Coles (COL) and Costco (COST) have withstood the market volatility well.

While sales are expected to moderate after recent panic buying, these companies would likely see an uplift in growth if another wave of COVID cases spread across the world. Furthermore, if more consumers dine in and avoid restaurants, the new ‘normal’ may see consumers cook more food at home.

While our view of the broader consumer discretionary sector is that weakness will persist throughout 2020, we also believe that there will be some positive outliers in this sector.

Home-fitness related stocks are one area that we argue could do well on account of consumers who want to maintain their fitness regime. We like Nike (NKE) and Lululemon (LULU), which have both recorded a big uptick in apparel sales, plus Peloton (PTON), which has seen tremendous growth in sales of its exercise bikes and treadmills as gyms remain closed. Even once gyms are re-opened, we see consumers opting for a cautious approach, favouring exercise at home or ‘remotely’.

The rest of the sector is likely to be shaped by confidence in suppressing or eliminating the pandemic. Weekly retail spending has surged higher by as much as 30-70% in Australian cities where lockdowns have been eased.

However, this is coming from a very low base. If another outbreak is avoided, or a proven treatment or vaccine is found, we think there could be pent up spending that would bode well for a late-year rush. Nonetheless, we do not see this outcome as the base case at this time until at least next year.

Where to avoid investing in 2020?

Bank stocks are likely to face ongoing headwinds in 2020 with the impact of the global economic crisis yet to fully play out. The banks have only begun to set aside provisions that largely assume a recovery later this year, however, these impairments may not prove sufficient if unemployment remains in a prolonged downturn.

What’s more, we think banks’ margins will remain capped as interest rates sit at historical lows for the years to come. Notwithstanding ‘pauses’ in mortgage repayments, we also consider the risk that bad debts could be understated. Dividends also look unlikely in this environment.

Elsewhere, despite the fact economies are set to re-open, we remain much more pessimistic around the near-to-mid-term outlook for travel. Although we understand progress is being made towards identifying treatment options or a potential vaccine for the Coronavirus, we do not anticipate international travel to rebound to pre-COVID-19 levels for at least 3-5 years, as was the case following 9-11 and the GFC.

It is our view that a large proportion of travellers will be disinclined to travel until a vaccine is proven, regardless of whether some countries ‘eradicate’ the virus. As such, we hold a bearish outlook towards hotels and airlines, although Sydney Airport (SYD) is a stock we hold due to its role as critical infrastructure and its prevailing importance to the economy in the long-term.

As we touched on earlier, consumer discretionary is a segment that in our view will consist of polarising investment opportunities. Whereas home-exercise stocks have reason to see sales uplift, gyms will continue to face difficulties around consumer mindset and behavioural adjustment. Similarly, social distancing guidelines that are likely to remain for the medium-term will dampen business activity for restaurants and other leisure-related stocks.

Finally, the energy sector is a segment of the economy that we think could move pretty quickly in either direction. It’s certainly an area that we think will do well in the long-term as demand picks up and oil prices revert towards historical averages.

However, the sector was also seeing structural issues leading up to COVIF-19. Furthermore, in the event of another wave of the pandemic, the energy market would all but face the same headwinds as it is facing now. As such, the sector does not represent a compelling risk-adjusted opportunity for us at this time.

Keeping a watchful eye

Although financial markets are likely to be swayed by volatility in the coming months, we see numerous opportunities in areas where economies will be repositioned to facilitate a gradual recovery.

Like past downturns, stocks can get caught up in the broad-based sell-off even when they otherwise stand to benefit from some of the unfolding changes taking place. It’s our role to remain responsive in identifying those opportunities and we remain confident this will prove another one of those instances where history repeats itself.

Get investment ideas from industry insiders 

Liked this wire? Hit the follow button below to get notified every time I post a wire. Not a Livewire Member? Sign up for free today to get inside access to investment ideas and strategies from Australia’s leading investors. 

Michael Smith
Managing Partner
Kauri Asset Management

With over 15 years of experience within the financial services industry, Mike possesses an outstanding acumen and extensive insight when it comes to global equity markets and a range of financial services products.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.