World Reimagined: What Does The New Economy Look Like?
For many, the coronavirus turned life upside-down nearly overnight. Despite hopes for a V-shaped economic recovery and life returning to normal within months, the scientific community is coming around to the idea that Covid-19 may become endemic, somewhat like the annual flu. The argument rests in part on the fact that there has only been one virus, smallpox, that has truly been eradicated, thanks to a highly effective vaccine.
Management of coronavirus infections will improve, reducing the severity of the disease for those infected, and a widespread vaccine should decrease the likelihood of infection, but the virus itself may be a part of our lives well into the future. For those pinning their hopes on a miracle vaccine that is 100% effective, on average, it takes ten years to create a vaccine from scratch, and no vaccine has never been developed in less than five years. It is unlikely that this virus will be eradicated even in the medium-term.
So what ought investors keep in mind in the coming years?
First off, those currently benefiting from the pandemic include the following:
Home-based fitness products and services, including athleisure brands, have enjoyed strong consumer demand. You’ve probably heard of the big names such Peloton (PTON), whose share price is up over 330% in 2020, and Mirror, which was acquired by Lululemon Athletica (LULU) in Q2 2020 for $500 million. This was the first acquisition for the athleisure brand, which is looking to expand its offerings as its share price has risen over 40% this year. Some lower-profile names include Nautilus Inc (NLS), which sells home-fitness equipment under the brands Nautilus, Bowflex, Octane Fitness, and Schwinn, which has seen its share price skyrocket from less than $2 at the start of the year to over $25, an increase of over 1,400%. Major athleisure brand Nike (NKE) lost nearly 40% during the market correction earlier this year but is up nearly 30% in 2020, gaining over 100% from the March lows.
As people have spent more time at home - working, cooking, and homeschooling - spiffing up one’s space has boomed. Home products and home improvement companies such as Wayfair Inc (W), RH (RH), Lowe’s Companies (LOW), Williams-Sonoma (WSM), and The Home Depot (HD) have seen their shares rise over 190%, 80%, 40%, 35%, and 28% respectively this year.
Social distancing rules have helped camping and outdoor sporting companies. Across the U.S., retailers and rental agencies are reporting inventory shortages and record demand for RVs. Unit shipments in August were up 17% YoY, according to the RV Industry Associations, who also expects 2021 shipments to set a new record. Winnebago (WGO) just reported its fiscal year close last week, which saw a record level order backlog of $1.85 billion for boats and towables (up 200%) and motorized RVs (up 500%).
Other beneficiaries of this change in how some vacation and spend leisure time include Camping World Holdings Inc (CWH), YETI Holdings (YETI), and Thor Industries (THO), whose share prices are up over 85%, 45%, and 18% respectively in 2020. Vista Outdoor Inc (VSTO), which designs, develops, and manufactures outdoor sports and recreation products, has also benefited. From January 2017 to September 2019, its share price had fallen nearly 90%, but year-to-date is shares are up 180%.
Online retailers and logistics firms have benefited from a world that has become a whole lot more complex during the pandemic as consumers flocked to digital shopping, while brick & mortar retail has been punished. We have all heard about how well Amazon (AMZN) has done, but logistics and shipping firms such as H. Robinson Worldwide (CHRW), Old Dominion Freight Line (ODFL), and U.S. Xpress Enterprises Inc (USX) have also benefited, up over 28%, 60%, and 40% respectively in 2020.
Online learning or career re-tooling companies such as 2U Inc (TWOU), Lincoln Educational Services (LINC), and Chegg Inc (CHGG) have seen their shares up over 55%, 100%, and 125%, respectively, this year.
Who's Getting Punished?
While the headlines have been joyous over the rebound in retail sales, that accounts for only about 40% of consumer spending. The other 60% has seen a major retrenchment with total consumer expenditures down 4.3%, annualized year-to-date.
- Travel and hospitality, particularly airlines, cruise lines, hotels, dine-in restaurants, and travel agencies, have been hit hard. Spending on hotels and motels alone is down around $88 billion annualized as of the end of September. Air travel is down around $45 billion annualized.
- Health and wellness services such as gyms, spas, and even dentistry practices have been forced to close or have found that former clients are too wary. Healthcare spending alone is down over $160 billion annualized through the end of September.
- In-person entertainment such as sporting and music events, live theater, movie theaters, casinos, and theme parks have been brutalized by social distancing or government-mandated closures, and with them supporting and ancillary businesses and services. Spending on casinos is down around $27 billion annualized through September and down about $13 billion for live entertainment.
- Household services have also taken a hit, with childcare expenditures down about $13 billion and domestic services such as housecleaners down $6 billion – a boon for iRobot (IRBT), whose shares are up over 65% year-to-date.
Long Term Effects
Looking at the long-term impacts of the pandemic, one of the first things to come to mind is debt. Aside from the various private sector parts of the economy that have been directly affected, we’ve also seen an unprecedented level of borrowing in both the public and private sectors. Before the end of 2019, the world was already facing a record level of debt-to-GDP. Then in the first quarter of 2020, global debt surged to a record of $258 trillion, with the debt-to-GDP ratio rising over ten percentage points, the largest quarterly surge on record, to reach 331%. In the second quarter of 2020, debt issuance hit another record of $12.5 trillion, compared to a quarterly average of $5.5 trillion in 2019, with 60% of issuance coming from the public sector.
Debt-to-GDP in mature markets rose to more than 392% of GDP, up from 380% in 2019. In emerging markets, debt-to-GDP rose to 230%, with $3.7 trillion of emerging market debt coming due through the end of 2020, rising to $4 trillion in 2021.
What this means is that future growth in much of the world will face a formidable headwind from all that debt. Servicing the debt will not only weigh on earnings generation but also reduce capital available for reinvestment. This likely means the struggling brick & mortar retail industry, which already saw a number of bankruptcies filed in 2020, is likely to be in for more pain in 2021. RapidRatings, a company that stress tests the financial health of companies, sees several branded apparel companies, including L Brands (LB), Children’s Place (PLCE), and Cato Corp (CATO), as well as department stores and home furnishing companies, such as Macy’s (M) and Dillard’s (DDS), as being particularly vulnerable.
The inevitable bankruptcies and debt defaults to come will also cut into capital available for reinvestment and spending in general. In such an environment, we will continue to see the larger and more well-capitalized companies have better access to capital at lower rates, which will likely mean an extension and expansion of the phenomenon in which smaller companies are gobbled up by the larger ones. Even though well-funded companies will take advantage of the pain to expand either their product offering, geographic reach, or to plug another shortcoming, odds are not all these struggling companies will survive.
If history holds, that means jobs will be lost.
With all that debt on their balance sheets, companies will be looking for ways to cut costs, and the work-from-home normalization has opened up possibilities to cut both fixed costs in terms of office space and possibly reduce salaries as employees can move to areas with lower costs of living. While this is a headwind to corporate office space, it is also a tailwind to cloud computing, virtual office services, video conferencing, and flexible office space providers. Companies to keep an eye on include Microsoft (MSFT), ServiceNow (NOW), Zoom Video Communications (ZM), VMware (VMW), Atlassian Corp (TEAM), Splunk (SPLK), and Snowflake (SNOW).
We are also likely to see in the future a higher level of precautionary household savings, which means a falloff in consumption growth in the absence of government stimulus. In the U.S., the personal savings rate rose to a record 33.6% in April, then fell to 14.1% in August (seasonally adjusted and annualized), still well above the 8.3% pace in February. Household savings as a proportion of income in Australia rose to nearly 20% in the second quarter from 3.6% in the final three months of last year and 28.2% for Canada from 3.6% at the end of December 2019.
A recent survey from Deloitte projects holiday spending to decline 7% YoY, with 38% of the 4,000 consumers surveyed expecting to spend less this year during the Thanksgiving-Christmas period. This will continue to be a tailwind for online retailers that can offer consumers more for less, such as Amazon (AMZN), Target (TGT), and Walmart (WMT). As consumers around the world have been forced to get increasingly comfortable with buying online, logistics firms will also likely see demand for their services continue to expand.
The hit to the travel and hospitality sector has been unprecedented. Expect to see consolidation in the space and, more than likely, quite a few government bailouts/stimulus efforts. As is almost always the case, consolidation will likely mean the big guys -who have better access to capital and are closer to too-big-to-fail from a bureaucrat’s standpoint – incorporating smaller players. We’ll be keeping an eye out on the pace of RV purchases, as after buying one of those, families are unlikely to be getting on a plane and staying in hotels, even post-pandemic.
The hit to travel and hospitality combined with increased consumer frugality after spending to beef up one’s home will also likely mean many jobs in those sectors will not be returning. Former restaurant employees, hotel staff, and airline workers will need to retool, a tailwind for adult education services, particularly those offering their services online, some of which we mentioned above.
The bottom line is that the world is unlikely to ever go back to what it was pre-Covid. Corporations, households, and governments will be forever changed by what we have experienced and will continue to experience in the coming months, if not years. The world has become more uncertain, with lower levels of trust in our institutions and leaders. The downside is that we have not experienced such a dramatic hit to the global economy in modern history. The upside is that technology combined with the normalization of work-from-home means that budding entrepreneurs have an unprecedented array of relatively inexpensive tools available at their fingertips at a time when a home office isn’t something that needs to be disguised.
Many of the world’s most impactful companies were born in the depths of economic despair, and some of the companies that will be the pioneers of tomorrow have not yet even been born.
- Amazon (AMZN) and VMWare (VMW) are constituents in the Tematica BITA Digital Infrastructure and Connectivity Index.
- Splunk (SPLK) is a constituent in the Foxberry Tematica Research Cybersecurity & Data Privacy Index.
- Nike (NKE), Target (TGT), Walmart (WMT), and Williams-Sonoma (WSM) are constituents in Tematica Research's Thematic Dividend All-Stars Index.
- Peloton (PTON) and Lululemon (LULU) are constituents in Tematica Research’s Cleaner Living Index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.