Recently, a lot of ink has been spilled on the gargantuan fiscal and monetary backstop policies that came as a response to the Covid-19 pandemic. More is to come, especially on the fiscal side. However, the EU next generation fund consisting of EUR 750 billion in grants and loans is definitely a giant leap towards safeguarding the European project. Approval is needed by all 27 EU member states but France and certainly Germany’s backing of the plan should facilitate a positive outcome. Clearly, on the monetary side, the ECB has excessively lowered its deposit facility rate, into negative territory, which has put the banking sector under huge pressure. We doubt that the Fed will make the same mistake and will stick to its forward guidance policy or potentially revert to YCC or yield curve control. Still, Powell released a statement referring to negative deposit rates last month, which was not exactly crystal clear: “for now, it is not something we are considering”. Not only do we have to deal with negative deposit rates in the EU, but we are also facing spiralling credit losses due to the lockdown’s major economic fallout. In addition, some banks have been forced to suspend their dividend policies, rendering the banking sector quasi uninvest-able. This is eerily reminiscent of the path taken by its Japanese peers a couple of decades ago (i.e. continued P/B multiple compression and subsequent underperformance compared to the benchmark). As economies have started to re-open, we remain sceptical as to how fast animal spirits will be revived among consumers and corporates. Indeed, China reopened its workplaces nearly three months ago, but domestic demand recovery has been rather tepid. In the eventuality of a material second Covid-19 wave (note that, except for SARS, all pandemics in the last 100 years have had a second wave), governments around the world would have to carefully consider their next steps, as another global lockdown would be tantamount to economic suicide. In this scenario, a selective confinement of the most vulnerable individuals would make more sense: It would allow the healthy, and active population to keep working, in order to try to sustain the welfare state. More testing will be crucial to facilitate such an outcome. Complete normalisation will only be possible when we have a fully-functioning and widely available vaccine. Note however, that COVID19 cases continue to rise (as a result as well due to the increased testing) in important US states, like California, Texas or California so calling and end to the first wave of the pandemic is premature. Supposedly, a vaccine developed by the university of Oxford, in partnership with Astrazeneca, has been effective on rhesus monkeys. Its production has already started. However, there is no proof yet that it is also safe for humans. Fortunately, if this one fails to be successful, then there are still close to 350 other vaccines and treatments that are being evaluated to combat the coronavirus. It is only a matter of time before humankind finds an all-encompassing solution to eradicate the coronavirus.
Regarding geopolitical developments, ominous clouds have swiftly gathered on the horizon. Last month, Trump drew China’s ire by encouraging Taiwanese wafer fab company TSMC to erect a state-of-the-art 5nm plant in Arizona. The project is scheduled to begin in in 2024. To make matters even worse, the US administration has decided to cut Huawei off from global semiconductors supplies and related intellectual properties. It has imposed an export license on every semiconductor manufacturer that fabricates chips (designed using US software or a US-based kit) for Huawei. This comes on top of earlier actions, which already restricted export sales of a wide range of technologies to Chinese military-linked companies. In addition, the US has also previously prohibited one of its USD 770 billion retirement plans for federal employees to invest in Chinese equities. China has responded by imposing its National Security Law in Hong Kong, which basically upends the ‘one country, two systems’ model that was implemented in Hong Kong since 1997. Is the sequel to 2019’s trade war upon us, or is it merely posturing to divert attention away from the reality of the economy? We are inclined to think it is the latter, as it is clearly not in Trump’s (nor Xi’s) best interest to send stock markets down the drain five months before the US presidential elections. But surely, this latest geopolitical wrangling between the US and China brings an additional layer of uncertainty to the markets, and will only further push companies to adapt their supply chain strategies.
With Q1 reporting nearing its end, we would like to share some interesting trends on the company/subsector level:
One notable point of interest is the significant outperformance of the Nasdaq Composite over most global indices. As always, when tech performs well, (retail) investors get vertigo, because this “must surely be another tech bubble”. However, we need to carefully consider a crucial underlying trend to get a clearer picture of the current outperformance. The digital transformation of the global economy has been underway for many years. This has been happening on many fronts. Companies are increasingly adopting software as a way to enhance productivity, to create a competitive edge or to save costs. Meanwhile, consumers are also adopting technology at a speed hitherto unseen, ranging from an increased usage of e-commerce, to digital solutions in payments and healthcare. All this, in turn, necessitates bigger, better and faster networking- and cloud capacity (see graph below on the increased cloud adoption, in the US and China). Covid-19 has fundamentally shaken up the world, and incumbent companies need to recognise that change is necessary to survive.
