value and opportunity

Two and a half months after the end of “Panic Journal Season 1”, it seems that “Season 2” is about to start (or has started already in some areas like Madrid or Israel, or never ended as in the US)

Time to summarize what from my point of view has changed or been confirmed since season 1:

Positives:
+ Vaccine efforts are well on the way. AstraZeneca, despite a short interruption still seems to be a forerunner and end of 2020 seems to be realistic for a functional vaccine to be available
+ although the US had many days with more than 1000 deaths a day, overall the ratio of deaths to reported infections seems to go down in most parts of the world

+ current outbreaks (see below) seem to be contained by local actions (Mask wearing etc.) and the risk of a general big second lock down seems to be low. So no need to stock up on toilet paper again….
+ Many businesses have shown quite some flexibility in running in a pandemic environment. Most companies that went bankrupt so far were on the brink of bankruptcy anyway
+ Governments have acted fast with mostly pretty efficient stimulus packages that benefited this time ordinary peopel as compared to the GFC
+ even previously unthinkable topics as common debt for the post-Brexit EU suddenly seem to be possible in the near future
+ working from home for many companies seems to be no problem at all
+ supply chains have held up well and there were few real shortages of anything

Negatives:
– despite the hype, the highly awaited warning apps are not a game changer. Good old contact tracing by phone is still the most efficient countermeasure (apart from testing, distancing, masks and fresh air
– even light holiday travel has spread the virus again in Europe, in other parts of the world, especially the US numbers never really went down
– despite the obvious improvements in treating sick people, a surprising large number of people still question why the initial lock down was necessary
– we saw quite some cases of “under reported” infections such as in Mallorca (which got only fixed coincidently when German vacations were over). Just yesterday, Turkey (what a surprise) admitted to fudging infection numbers by only including positively tested people with symptoms. I am willing to bet that Austrian skiing regions will be “Corona free” when the first snow is falling…..
– infections are on the rise in many countries with, at the time of writing, Israel actually preparing for a 3 week lock down, other hot spots are Madrid and the UK (again). Even my hometown Munich crossed temporarily the threshold last week with mandatory mask wearing in public. And Winter didn’t even begun…
– “normal life” will most likely only return by the end of 2021 as Dr. Fauci nicely explains here
– it’s really interesting how stupid some (local) policy makers are, latest example is Florida
– in many countries (for instance Germany), bankruptcies have been only delayed via temporary changes in law. In some sectors (tourism, restaurants etc.) these will hit for sure in 2021
– The UK still thinks they can afford to play games with BREXIT

Further observations:

Quick reopening

One general remark/observation from my side: Some pundits/politicians belief that if you only open up everything and even prohibit masks, everything will be Ok in short time. However they forget one important point: You cannot force these people out on the streets who are scared of the virus. To the contrary, I think those who are vulnerable and actually care about their health will be even more scared. So yes, you might go back to 60-70% sooner, but the full recovery will only happen when the scared people go out again and this will last longer if openings are done prematurely and they feel unsafe. But who cares about next year anyway these days ?

Super fast track approval of vaccines

Certain people think the faster vaccines are approved, the quicker and easier Covid-19 will disappear. Again i think people are overseeing some issues. First, there is unfortunately a growing (and loud) group of people who are “anti vaccine” in any case. Such politically enforced shorter deadlines will give them all the tailwinds they ever dreamed of. Once vaccination starts I bet that these groups will spread miss-information like crazy via social networks and try to scare away people from getting their shots. The vaccination process will be anything but smooth and could take a lot longer than many people think, even in rich countries.

(No so) Easy Dancing

My initial estimate from June of a relatively “easy dance” and a strong rebound in 2021 seems to have been clearly premature. Yes, 2021 will be better than 2020 but we will most likely not go back to 2019 numbers in aggregate, and some industries might even do worse.

Donald Trump tests positive / US elections

This is a new development that just happened during writing this post. My first reaction was: “This must be a stunt”. However this shows how distrust has grown to a level that no one seems to believe anything these days. 

With regard to the election, I do not think that the result will change much with regard to the stock market. In German there is a saying: “Politische Börsen haben kurze Beine” which means that politically driven stock market moves are mostly not relevant in the long run. 

Markets:

In the directly hit sectors like airlines and hotels, people have begun to realize that this will not be a V shaped recovery and 2021 will not be like 2019. Stocks like Lufthansa, TUI  or hotel groups now trade lower than during the “panic” in March. Maybe Warren Buffett made a mistake buying US Airlines, but selling out rather early now seems to have been a smarter move.

Just yesterday, for instance Rolls Royce announced a deeply discounted rights issue which is something that is clearly the last resort before declaring bankruptcy. I guess we will see more travel/entertainment/restaurant ect. stocks doing this going forward.

Some changes like zero interest rates in the US will have long term impacts such as making banks and insurance companies a lot less profitable. Again Warren Buffett seems to have seen this early by selling one of his biggest und longest holdings Wells Fargo at a rather “cheap” valuation.

I am still puzzled that short term profiting business like big home improvement stores went up by so much as they have a natural disadvantage vs. their E-Commerce only competitors and even if Covid-19 will be an issue 2021, people won’t paint their house again or build a second swimming pool.

There are a lot of sectors (Office real estate, retail, travel  etc.) where the future is anything but clear and it looks more and more that just surviving 2020 will not be enough.

The biggest open question for me (still) is if and how this episode will change the permanent behavior of people with regard to living, restaurants, travelling etc. The longer all this goes, the deeper the potential changes.

One of the biggest risks for an analyst would be to look at his/her own behavior and then extrapolate from there to everyone else. I think what we are seeing at the moment is a bifurcation between people who want to (or need to) go back to the old way and people who can afford to change their way of living permanently.

For myself for instance I think that 1-2 days of work from home will be the new normal for many years to come but for someone working at a super market, this is not an option.

One very interesting area is clearly the whole energy sector. With regard to Decarbonisation, I have the feeling that some tipping point has been reached here. So just buying “cheap” oil stocks and hoping for a recovery might not be such a brilliant idea.

Portfolio to do’s:

How all this plays out needs to be seen. Personally, I do not hink that this is the time for big bets in the portfolio, but honestly I have been thinking like that for the last 7-8 years. I will also need to reassess how vulnerable some of my more exposed portfolio companies are to another weak tourist year 2021. Especially my Richemont and Sixt purchases assumed a faster recovery.  Some of the sales (Handelsbanken, Coface) look better now. Some of the “buy and sell” transactions (Mutui !!, Disney) look super stupid.

Stay safe !!!