With the ‘great reset’ during pandemic, a lot has changed after the social experiment that the human kind went through. From business model transformations to greater focus on human centricity in innovation. Equity investor might wonder where to look for opportunities in 2021 arising from disruptions of 2020 and catalytical effect of the COVID on existing megatrends.
To begin with, one would acknowledge that the policy response (Central Banks and Treasuries acting in tandem to release total stimuli of $27 trillion or 31% of global GDP) to the exogenous shock has been swift and monumental. This is reflected in the equity markets finishing the year higher than from where they started. Also embedded at this point in time are the expectations of pent up demand returning strongly post-COVID. This pent-up demand return, especially in services, should lead to a gradual fading of disinflationary pressures in 2021. A key support would come from a return of earnings growth in global businesses back to their long-term trend, and improving fundamentals.
This is leading to a rotation into cyclicals and COVID-impacted sectors of transportation, consumer discretionary and industrials etc. Increased market breadth is a much-welcomed result. 2020 has been characterized by very high market concentration with top 10 stocks accounting for nearly 30% of the S&P500 and 36% of the MSCI AC ex. Japan. On average only slightly over 1/3rd of stocks globally are in the positive territory for the year despite numerous indices touching all times high levels.
Equity valuations have risen for most global markets, surpassing their 10-year median levels. These valuations have been supported also by nearly 15 trillion of negative yielding debt globally, that lowers the implicit cost of equity in valuations.
With Central Banks sitting firmly on expansionary policies, it appears to us that 2021 would open up a large range of equity opportunities to own. Our tilt will be towards those that have successfully transformed their business models during the COVID. Examples include companies that have been quick in adopting digitization, automation, reinvigorating their supply chains, and gaining market share from the status quo.
We would look for investment opportunities in businesses that have turned to multiple forms of digital engagement with customers, companies that have gone out to develop new product offerings. One example will be Darden Restaurants (DRI), that has been quick in setting up digital direct-to-customer channels as the COVID crisis decimated their core restaurants sales. Similarly Netflix (NFLX) in the entertainment industry has generated large quantity of new content to fill the void in programming created by the suspension in sports leagues.
What are the risks that could derail or delay the bull case from materializing in 2021? Most importantly the logistical challenges related to distributing the COVID-vaccine to the global population. A relevant study on the topic has been conducted by McKinsey and DHL, and that concluded that a global coverage would require approximately 200,000 pallet shipments, 15 million deliveries in cooling boxes, and nearly 15,000 flights across the globe. Other related challenges include the broad acceptance of a vaccine and unforeseen policy hick ups and health systems setbacks. Secondly, a Biden presidency and a divided US Congress both off set each other, though a tilted equation on one side would have meant higher corporate taxes, and further escalation with China on the other side. Finally, increased indebtedness of economies and enlarged fiscal deficits in both developed and developing countries are risks to the downside.