Let’s consider how the world has changed in the past six months. Physical distancing is now the rule and working from home has emerged as a secular post-COVID-19 theme. A lot of people don’t seem to want to hear this, but it is true nonetheless. Not everyone prefers to work from home but a whole lot more do, now they have a taste of what it is like not to have to spend money on business attire, or spend two hours every day fighting traffic.
KPMG just conducted a U.S. study and found that miles driven are down 10 per cent year over year and that includes all the road vacations that have replaced travel by air. The University of Chicago weighed in with a survey of its own and estimated that Americans working from home are saving 60 million commuter hours each workday. The poll also shows that 52.3 per cent of Americans are now working from home. Meanwhile, U.S. retail sales data show e-commerce and mail orders now account for more than 14 per cent of all retail activity and that is up from just over 11 per cent when the pandemic really began to hit in February, and a 3-per-cent share two decades ago.
Frankly, I have concerns over the valuations of the stocks geared to this new thematic and the extreme market concentration we have on our hands, not to mention the bizarre retail trading in the options market that has recently accounted for a record share of total trading activity. This is unheard of and speaks to an unstable market structure. These are big concerns.
But what we do know just based on math is that ultralow interest rates have boosted the valuations of companies that are expected to earn the bulk of their profits in the future – sometimes years down the road. When discounted back to the present, far-off cash flows are worth more today than in a higher-rate world. That calculation has helped lift growth stocks to records even as earnings expectations have come way down. The investment community is paying more for duration (those stocks that have benefited most from falling rates) today than they ever have in history. Since we can anticipate rates to stay low for years to come, this valuation driver becomes the dominant issue that will determine the market and prospective returns. This is exactly why growth investing trounced value for much of the past decade, even before the pandemic.
Ultimately, the growth-versus-value decision depends on what the world will look like once COVID-19 is in the rear-view mirror. But even with a vaccine, if we return to a pre-COVID-19 world it actually means a return to a slow-growth, low-interest-rate and low-inflation world, which means growth will remain the place to be because they are the longest duration stocks in the equity market. For cyclicals and value stocks to work, you want faster economic growth, inflation and higher interest rates. There’s been some talk of that lately, but so far, let’s face it, it’s a trade but not a trend. Not yet, anyway.
So the future, at least for the near to intermediate term, is one in which working from home is certainly going to be a more dominant force, with obvious negative implications for commercial real estate, but positive implications for internet infrastructure, computer hardware or video conferencing like we’re doing now. At the same time, urban working and living will undergo a profound shift and there is also a secular change, a much greater awareness and appreciation for space (as in open space). There is going to be a sharp reduction in travel to work, travel in general – nothing here that is very good for the auto or office real estate sectors, that’s for sure.
But there are some bullish themes that emerge, too. As we go into an era of elevated personal savings rates, people are going to focus on what they need, not what they want. Anything related to e-commerce, cloud services and wiring up your home to become your new office is in a new secular growth phase. Delivery services have now become essential so here is a budding bull market right there for Amazon, which is obvious, and any business model that copies it. I should tack on grocery chains with online services coming out of this as a winner. So, the shifting behaviour that is already taking place tells me to focus on consumer staples and on other areas of the market that have become essentials. And it’s apparent to me that you want to have exposure to the health care sector because this clearly is an underinvested area and will, without a shadow of a doubt, become less regulated in the future, no matter the U.S. election outcome.
There are other ways to hedge and diversify, such as selective real estate investment trusts, which have stable income, notably health care and industrial, the latter of which is benefiting from the Amazon effect. Sustained, uber-low interest rates make these REITs’ stable yields more attractive. I like the safe yield concept around utilities and utility-like firms in technology, health care and pharma. Any investment strategy preparing for the “new normal” should emphasize that work-from-home remote lifestyles, 5G and cloud computing will all continue to favour big cap technology stocks with these utility-like or “essentials” characteristics. I’d prefer to pick these plays up at better prices than we have today; I would be an avid buyer on any significant pullback.
In any event, we all have to become increasingly thematic and thoughtful in our decision-making and more selective than normal.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
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