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Pandemic Risk Scenarios in Stocks

Analysing The Deeper Economic Pessimism Underlying Covid-19 While we hope for the best possible outcome, we believe that the Covid-19 pandemic has fundamentally changed the world as we knew it. Many of these changes are likely to be permanent.

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Pandemic Risk Scenarios in Stocks

Analysing The Deeper Economic Pessimism Underlying Covid-19

JULY 2020

Shiva Mitra, Senior Analyst

A vaccine is still some time away..

Since first being reported in Wuhan, China, the SARS-CoV-2 pandemic (also known as the Coronavirus and Covid-19) has spread across the globe, swiftly and widely. It has affected over 10 million people across 213 countries, resulting in over a half million deaths to date. However, the pandemic is nowhere near its end. While new infections in Europe have significantly tapered, the U.S. confirmed case numbers are accelerating. Meanwhile, China is battling a second wave and densely populated countries like India and Brazil aren’t expected to reach their peaks anytime soon.

Hopes for an end to the pandemic rest on the development and distribution of a vaccine. While there are approximately 141 candidates of which 13 are in clinical evaluation (including those by Moderna, Oxford University/AstraZeneca and Pfizer/Fosun/BioNTech), the most optimistic estimates would see a vaccine become available in early 2021. Assuming that a vaccine becomes available by then, for it to be manufactured at scale and distributed widely, and rapidly will be a herculean task expected to take months or years. Less optimistic estimates for vaccine development range from late in 2021, to several years, or never successfully developed at all due to the mutation of the virus or other factors. The best hope may not be a vaccine at all, but rather the development of a range of antivirals and therapeutics that significantly reduce mortality and/or transmission rates. With no highly effective drugs yet on the horizon this effort could be prolonged as well.

Shift in consumer behaviour to hurt consumption driven economies

With no vaccine or specific, high-efficacy antiviral drugs available, governments worldwide have resorted to containment measures such as lockdowns, travel restrictions and social distancing. While helping to slow down the infection rates, these measures also dealt a massive body-blow to the global economy.

In the U.S. and Canada, the economy has contracted significantly and spawned unprecedented levels of unemployment. With fear and panic running wild across Main Street, consumer sentiment towards non-discretionary spending went into a full-blown retreat. Most people are simply not buying non-essentials at the previous levels. While savings rates have escalated, such a significant decrease in spending has forced economies into severe recessions that are likely to worsen significantly as the pandemic and its impact plays out.

Bulls in the Bear Garden - Irrational Exuberance is the new fizzy drink

As the potential damage from the pandemic became clearer, investors panicked causing widespread selloffs in equity markets. The DJIA and TSX plummeted more than 35% and 26% respectively between February and March. Panic was fuelled by: the rapid spread of the virus, uncertainty over the future course of action, and uncertainty around the economic impact. However, after the initial panic, both the aforementioned indices rebounded sharply by almost 30% and 40%.

We believe that equity markets currently do not represent the economic reality of the pandemic impact and the nature nor potential length of the recession. There are large numbers of companies trading at premium valuations that do not reflect underlying business drivers.

 

Moreover, many of these companies carry heavy debt burdens which may become increasingly difficult to service given the macroeconomic headwinds.

 

To say that a best case scenario has been built into equity markets would be accurate. We believe risk levels have increased as a result and that a re-evaluation of equity prices reflecting a severe, long drawn out economic decline will take place.

Digitization and Health Care trends turbo-charged

We believe that the pandemic has turbo-charged two existing megatrends – digital transformation and a focus on human health, safety & longevity. Denominating them as factors necessary for conducting ‘business-as-usual’. The pandemic has highlighted that ‘digitally-enabled’ organizations are better equipped to address business continuity concerns. For instance, retailers who had e-commerce platforms in addition to brick-&-mortar stores were relatively less impacted during lockdowns and the subsequent restricted re openings, and firms where employees could work remotely were more likely to maintain productivity. Hence, the move towards digitization is a one-way street. Businesses which are digitally empowered or enable digital empowerment are likely to thrive in the post-Covid world. In fact we believe a second, larger and more pervasive internet and digital economy “boom” has begun.

 

One of the biggest changes that the pandemic has brought about is the way people perceive seemingly mundane things. Activities such as going to workplaces, travelling, dining out or meeting friends are no longer seen as safe. Avoidance of in-person contact and non-essential travel have now become a part of the common psyche. This has brought about drastic changes in how people behave and will continue to play a pivotal role in life and work choices for the foreseeable future. We believe that demand for products or services which mitigate these perceived risks will grow significantly.

 

For example, companies such as Teladoc, which provides telehealth services or companies which manufacture medicine, medical equipment, protective gear or disinfecting supplies are likely to witness strong demand in the foreseeable future. The pursuit of a vaccine, therapeutics is creating a revolution in the life sciences sector that we believe will change the economics and speed at which new drugs and therapeutics are developed and brought to market. 

KEY TAKEAWAYS

  • Availability of a vaccine is still some time away. Once available, swift and widespread distribution will be difficult to achieve
  • Consumers will live with the fear of contracting and spreading Covid-19
  • Travel, large crowds, physical socializing will be avoided over the longer-term
  • A general trend towards moving out of larger cities will commence
  • Digital transformation trends will accelerate and businesses will acclimatize to WFH
  • Businesses will be saddled with compliance costs of new health and safety regulations
  • Governments will face changes in consumer expectations and attitudes towards healthcare
  • Geopolitical risks will increase
  • Consumption driven economies, such as the U.S. and Canada, may witness turmoil while adjusting to the shift in consumer behaviour

A NEW REALITY

Covid-19 first reported in Wuhan, China in late 2019, spread rapidly across the globe. The World Health Organization(WHO) recognized it as a pandemic on March 11, 2020. Since the outbreak, the pandemic has affected over 10 million people across 213 countries and territories, resulting in almost over a half million deaths.

These are just the reported figures, the actual count may be much higher considering a large number of affected people may be asymptomatic or unaware they contracted the virus due to their low level symptoms or their lack of access to diagnostic testing or reliable testing. Moreover, data collation and reporting standards vary significantly across countries.


With no specific, high-efficacy antiviral drug available, the global response to the pandemic has leaned heavily towards containment and prevention. Given that the virus spreads through close human contact, the containment measures include greater stress on personal hygiene, protective clothing/accessories, social distancing and quarantine. These measures, while appearing relatively simple to follow, have had a tremendous impact across all aspects of human life and are fundamentally changing how people work, live and spend.

Covid-19: Cases and Deaths (1)

Source: Johns Hopkins University Center for Systems Science and Engineering

To prevent healthcare infrastructure from collapsing under excessive stress, governments all over the world adopted a ‘curve-flattening’ approach to spread peak infection rates over a longer period of time. This has been done by enforcing shutdowns and curfews, though the stringency varies from country-to-country, state to state and county to county. For the majority, the emphasis has been on limiting in-person contact by incorporating measures such as: travel restrictions, mandatory work-from-home / stay-at-home, temporary closures of stores and malls, curbs on public gatherings, etc. While this has helped slow the spread, the economic fallout has been devastating.

(1) Data as of day-end 17 June, 2020

THE ECONOMIC FALLOUT

In the United States, the exogenous shock of Covid-19 has brought the longest period of economic expansion in history to a brutal end. As the pandemic triggered social mobility restrictions and business shutdowns millions were thrown into unemployment.

GDP Growth Rate: U.S. vs Canada

As expected, the economic uncertainty amidst widespread lockdowns and job losses took a toll on consumer confidence(23). Consequently, consumer spending dropped sharply in the U.S. as well as Canada.

Consumer Confidence: U.S. vs Canada

With Main Street reeling, Wall Street too faced a moment of reckoning. As the potential damage from the pandemic became clearer, investors panicked, causing widespread sell-offs in the equity markets. The Dow Jones Industrial Average (DJIA) plummeted more than 35% between February and March, while the Toronto Stock Market Index (TSX) declined by 26% during the same period. Unavailability of specific or high-efficacy antiviral drugs, uncertainty over the future course of action and the initial impact projections fuelled the panic. Mirroring the uncertainty, the CBOE Volatility Index (VIX), a measure of the stock market’s expectation of volatility, shot up nearly 45%.

Benchmark Indices: DJIA vs TSX

Market Volatility: VIX

Industry-wise, the consumer sector was one of the first to see a hard landing given the social distancing mandate. Brick-&-mortar stores catering to non-essential items, such as apparel, faced temporary closures, while food retailers had to operate with restricted capacity and limited opening hours. On the other hand, restaurants and drinking places completely shut down except for takeaways. Consequently, retail sales in the U.S. and Canada, which include automobiles, food & beverage stores, restaurants, etc. fell sharply.

Retail Sales Growth: U.S.

Another sector which saw demand veer off a cliff was leisure & tourism. With lockdowns becoming the norm, both international and domestic travel went into a nosedive. Airlines were forced to cancel flights en masse and hotels faced temporary closures (or were repurposed as quarantine centres) as leisure and business travel came to a virtual halt. This exacerbated the plight of a relatively asset-heavy, low-margin industry which has reeled continually under debt servicing pressures. While the sectors to initially feel the pain were the ones that were directly impacted by lockdowns and social distancing, the contagion quickly spread to other sectors such as manufacturing, food processing, oil & gas, and real estate.

 

As far as debt servicing is concerned, sectors all across the board are facing pressures. As per S&P Global Ratings(4), among all debt issuers those most affected by pandemic-related disruptions are: the automotive, consumer products, transportation, and the media and entertainment sectors. With social distancing and travel restrictions wreaking havoc on demand, leisure and tourism companies are facing downgrade pressures as their liquidity, reserves and financial flexibility are put to a test. Within the consumer products sector, consumer durables face higher credit risks vis-à-vis consumer staples.

EMERGING TRENDS

Governments all over the world have been scrambling to contain the pandemic, implementing measures such as lockdowns and social distancing, and limiting activities which were the norm in the not-so-distant past but now no longer encouraged or considered safe, such as going to work, travelling or dining out.

 

As the world adjusts to the new reality where we work, travel, learn and socialize differently, businesses face a moment of crisis. This new reality is compelling businesses to re-think the way they operate. 

While the pandemic is boosting anything that can be done with minimal in-person contact, or online, it is an existential threat for businesses which rely heavily on physical contact with consumers. Certain industries, such as technology and healthcare, are likely to emerge much stronger. Others, like traditional brick-&-mortar retail, may suffer permanent damage.

 

We believe that the Covid-19 pandemic has turbo-charged two existing megatrends – Digital Disruption and a focus on human health, safety & longevity. While these trends have been at play for some time now, the pandemic has amplified these by denominating them as conditions necessary for conducting ‘business-as-usual’.

Digital Disruption

In the context of this report, Digital Disruption(5) can broadly be defined as the move towards enabling customer-oriented services by leveraging interconnected technologies such as cloud computing. In the real world, it can mean anything – shopping on Amazon while you lounge in your living room, hailing a cab from your smartphone using Uber, streaming your favourite movie on Netflix or having a virtual meeting on Zoom.

To be sure, these things were widely prevalent even before Covid struck, so much so, that many of these names have now become verbs as part of the popular vernacular. What Covid did was give us a preview of the world where the physical counterparts of these app-based, internet-enabled services doesn’t exist – A world where you can no longer go to retail stores or movie theatres, or to your workplace for that matter. While there was a learning curve to it, once people became accustomed to using these technologies, they most likely found it much safer and convenient.

The pandemic also highlighted that organizations which were already ‘digitally-enabled’ are better equipped to address business continuity concerns. For instance, retailers who had e-commerce platforms in addition to brick-&-mortar stores have been relatively less impacted during lockdowns. Moreover, organizations which embraced digitization early on in the pandemic were able to better navigate operational issues.

 

Hence, we believe that the move towards digitization is a one-way street. Once consumers navigate the learning curve, they are more likely to stick to it. Businesses which are digitally empowered or enable digital empowerment are more likely to thrive in the post-Covid world, in fact maybe they will be the only commerce that survives.

(5) Used interchangeably with ‘Digitally-enabled’, ‘Digitization’, ‘Digitally empowered’

Human Health and Safety

With no vaccine or effective antiviral drugs to counter the virus, the Covid-19 pandemic has painfully taught us the importance of a robust healthcare system. With the infection rate growing exponentially, global healthcare infrastructure has been strained to its limit. There has been unprecedented pressure placed on hospitals and clinics, from a shortage of testing and medical supplies to issues in accessing healthcare especially in rural areas. If not for the ‘curve flattening’ measures, our healthcare systems would have easily been overwhelmed.

Another critical factor has been the shortage of personal protective equipment (PPE). As the pandemic raged on, instances of frontline healthcare workers struggling to obtain minimum requisite protective gear became commonplace. 

 

Sanitizing supplies became prone to hoarding, causing severe shortages of consumables such as tissue wipes, disinfectants and hand sanitizers across the U.S. and Canada, as well as globally.

 

Another critical factor has been the shortage of personal protective equipment (PPE).

As the pandemic raged on, instances of frontline healthcare workers struggling to obtain minimum requisite protective gear became commonplace. Sanitizing supplies became prone to hoarding, causing severe shortages of consumables such as tissue wipes, disinfectants and hand sanitizers across the U.S. and Canada, as well as globally.

The greatest change, however, has been in the way people perceive seemingly mundane things. Activities such as going to workplaces, travelling, dining out or meeting friends are no longer seen as safe. Avoidance towards in-person contact and non-essential travel have now become a part of the common psyche. This has brought about drastic changes in how people behave and will continue to play a pivotal role in life and work choices in the foreseeable future. We believe that the demand for products or services which mitigate these perceived risks will gain heavily. For instance, companies such as Teladoc, which provides telehealth services or companies which manufacture protective gear or disinfecting supplies are likely to witness strong demand going forward.

A NEW NORMAL - THE WAY FORWARD

It has been almost six months since the coronavirus outbreak and almost three months since the WHO declared Covid-19 a global pandemic. As the initial panic subsided both the DJIA and TSX rebounded sharply, by almost 30% and 40% respectively since their March lows. With the economy gradually reopening, unemployment in the U.S. has declined and consumer confidence in both the U.S. and Canada has improved. The optimism, especially the equity markets, begs the question – Are we getting back to the old normal? To answer this, we need to look at several factors.

The Promise of a Vaccine

The pandemic is nowhere near its end. While new infections in Europe have significantly tapered, the U.S. confirmed case numbers are accelerating.

 

Meanwhile, China is battling a second wave and densely populated countries like India and Brazil aren’t expected to reach their peaks anytime soon.

 

Hopes for an end to the pandemic rest on the development and distribution of a vaccine. 

As per the World Health Organization, there are currently approximately 141 vaccine candidates, of which 13 are in clinical evaluation and 128 are in pre-clinical evaluation. Three of the candidates have been chosen under the U.S. Government’s Operation Warp Speed (OWS), namely Moderna’s mRNA-1273, The University of Oxford and AstraZeneca’s AZD1222 and Pfizer, Fosun and BioNTech’s BNT162.

 

The most optimistic estimates would see a vaccine become available in early 2021. Less optimistic estimates for vaccine development range from late in 2021, to several years, or never successfully developed at all due to the mutation of the virus or other factors. We believe that investors would be prudent to assume vaccine development will not follow a best case scenario.

 

The best hope may not be a vaccine at all, but rather the development of a range of antivirals and therapeutics that significantly reduce mortality and/or transmission rates. With no highly effective drugs yet on the horizon this effort could be prolonged as well.

(6) https://www.who.int/publications/m/item/draft-landscape-of-covid-19-candidate-vaccines; 18 June, 2020
(7)OWS is a collaboration of several US federal government departments with more than 18 biopharmaceutical companies to accelerate development of drug and vaccine candidates for COVID-19.

Geopolitical Environment

The Covid-19 pandemic has increased geopolitical tensions and the trend may continue over the long-term. The U.S. – China “blame game” in the backdrop of already strained trade relations may have a long-term detrimental impact on global trade. Moreover, with companies looking to relocate supply chains closer to their home countries, industrial globalization may take a significant hit. Further, it is also possible that populist blocs across the world may use the current apprehensions to stoke nationalist sentiments and influence policies that could threaten international cooperation. Domestically, countries may face unrest on the back of widening inequalities. Hence, the current situation is fraught with geopolitical risks which may serve to readjust status-quo and prolong the recovery period, if not derail it.

Consumer Mindset

Consumer mindset has been deeply impacted by the pandemic and this is likely to alter demand patterns. With the widespread availability of a vaccine still uncertain, sectors which are driven by people gathering in close gatherings (such as restaurants, entertainment and travel) are likely to see continued pain. Hence, the consumer spending pattern may undergo a drastic change. While the change in behaviour was sudden and affected by an enforced mandate, the return to the previous normal will be a much longer process, if at all .

 

We believe that for consumers to engage in non-essential activities it will involve them trusting the environment they are venturing into. Bridging this trust deficit, especially in the event of a vaccine not being widely available, will require considerable effort (and costs) on the part of consumer sectors. Given the economic climate, such efforts may not be affordable for many businesses to survive.

Economy

To quote the Nobel-winning economist Paul Krugman (8) “Well, whenever you consider the economic implications of stock prices, you want to remember three rules. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy.” This statement aptly captures the disconnect between reality and the current equity markets. While the stock markets have rallied sharply since their lows in March, the global economy continues to reel. As per the International Monetary Fund(9) (IMF), this divergence raises the specter of another market correction, as has been proven by previous bear-market rallies.

Notwithstanding the recent gains, unemployment continues to remain high in the U.S. and Canada. Even as the economy gradually reopens, consumers are reluctant to go back to previous normal behaviour. Spending patterns have changed as people avoid activities such as non-essential travel, dining out, shopping, etc. While this has hurt demand in consumer sectors, it has boosted savings. In the U.S., household savings rate spiked to 33% during Q1 2020, the highest ever on record and in Canada, it shot up to 6.1%.


The evolving economic landscape underlines a fundamental change in consumer behaviour even in consumption driven markets such as U.S. and Canada. It was a common assumption that since the economic shock was due to government-enforced lockdowns, things would go back to normal when the lockdowns are eased. As evident from the economic indicators, it hasn’t quite panned out that way. With ‘flight-to-safety’ instincts kicking in, consumers are likely to be cautious in the foreseeable future and this will consequently hurt demand.


Considering the aforementioned factors, most businesses are likely to witness pressure on demand as well as costs in the foreseeable future and those with debt-laden balance sheets may face an existential threat.

(8) https://www.nytimes.com/2020/04/30/opinion/economy-stock-market-coronavirus.html, 30 April,2020
(9) https://blogs.imf.org/2020/06/25/financial-conditions-have-eased-but-insolvencies-loom-large/

RISK FACTORS

Coming back to our question - Are we getting back to the old normal? To answer this question, we’ll have to consider the following scenarios:

Key FactorSub-factorRemarksBase-caseOptimisticPessimistic
VaccineVaccine AvailabilityDate when a successful vaccine first becomes availableQ2 2021Q2 2021 or earlierQ1 2022 or later
Inoculation EfficiencyHow widely and fast will the vaccine be distributed globally within 1 year of first becoming availableFast, Widespread distribution across developed economies and sporadic distribution across emerging economiesFast, Widespread distribution across developed and emerging economiesUneven distribution across developed economies
Economic Recovery
GDP Growth
Degrowth in Q1, Q2 and Q3 2020, followed by gradual, fragile recoveryDegrowth in Q1, Q2 and Q3 2020, followed by gradual, fragile recoveryDegrowth in Q1 and Q2 2020, followed by strong recoveryDegrowth in entire fiscal 2020, followed by gradual, fragile recovery
Unemploy-
men
High unemployment in Q1, Q2 and Q3 2020, followed by gradual, fragile recoveryHigh unemployment in Q1, Q2 and Q3 2020, followed by gradual, fragile recoveryHigh unemploy- ment in Q1 and Q2 2020, followed by strong recoveryHigh unemployment to persist until end-2021, followed by gradual, fragile recovery

Geopolitical risks
Trade ProtectionismRisk of key global economies pursuing protectionist policies during and after the pandemicProtectionist policies adopted, but only for short- to medium-termNo major protectionist policies enactedLong-term / permanent protectionist policies enacted
Probability of Civil UnrestRisk of civil unrest in key global economies on account of rising inequality, or other related factorsOccasional incidents but managed by law-enforcement without significant escalationNo major incidentsWidespread unrest, significant challenge for law enforcement agencies
Probability of International ConflictsRisk of international conflicts - military, cyber, bio-chemical or political, either due to “blame-game” or other related factors, played out directly or by proxyOccasional conflicts but resolved without significant escalationNo major conflictsMajor conflict(s) between any of the key global economies
Consumer MindsetTravel AvoidanceImpact of Covid-19 on non-essential travel and the likelihood of improved consumer sentiments towards travel and related activities post-Covid, for both business and leisure segmentsHigh avoidance, but sentiments likely to improve steadily in the medium-
term
High Avoidance, but return to pre-Covid sentiments in the short-termHigh Avoidance, Permanently or over long-term
Crowd AvoidanceImpact of Covid-19 on consumer sentiment towards social gatherings/activities which encourage crowding and the likelihood of improved sentiments, towards activities such as dining-out, theatres, public transportation, brick-&-mortar retail, etc. in the post-Covid worldHigh avoidance, but sentiments likely to improve steadily into the medium termHigh Avoidance, but return to pre-Covid sentiments in the short-termHigh Avoidance, Permanently or over long-term
Consumer Discretionary SpendingTrend in consumer discretionary spending in 2020 and 2021Low, but trending upRebound, and sustained growth to pre-Covid levels or higherConsistently Low, or sustained decline
Household Savings rateTrend in household savings rate in 2020 and 2021High, but trending downReturn to pre-Covid levels or lowerConsistently High, or sustained up-trend

Source: NXTanalytic Research

SECTOR ANALYSIS

The tables below reveal the impact that Covid-19 has had on industries. These factors are likely to continue affecting these industries in the short- to-medium term, and in some cases (such as consumer discretionary), for the long-term.

Considering the unprecedented risks that businesses currently face, they need to be evaluated with a different set of tools. With respect to investors, we believe that in addition to the conventional financial metrics, it’s paramount that they analyse companies based on how the pandemic impacts their core operations. As far as businesses are concerned, they must adapt to the new evolving reality or risk facing extinction.

GICS IndustrySub-sectorsBUSINESS IMPACTFINANCIAL IMPACT
Supply-sideRationaleDemand-sideRationaleCFFORationale
EnergyEnergy Equipment & Services; Oil, Gas & Consumable Fuels
NegativeSupply chain disruptions due to lockdowns or geopolitical issues; health & safety complianceNegativeLower demand due to SAH behaviour, restrictions on airlines services and public transportation servicesNegativeLower demand; supply chain realignment costs; and health & safety compliance costs
MaterialsChemicals; Metals & Mining; Construction material, etc.NegativeSupply chain disruptions due to lockdowns or geopolitical issues; health & safety complianceNegativeLower demand due to decline in economic activities such as construction, manufacturing, etc.NegativeLower demand; supply chain realignment costs; and health & safety compliance costs
IndustrialsCapital goods; Airlines, Transportation Infrastructure, etc.NegativeGovernment restrictions on operating flights/airports; Supply chain disruptions; health & safety complianceNegativeLower demand due to government restrictions of flights/airports; general economic slowdownNegativeGovernment restrictions; Lower demand; supply chain realignment costs; and health & safety compliance costs
Consumer DiscretionaryAutomobiles; Household Durables; Apparels, Restaurants, etc.
NegativeTemporary outlet closures; Supply chain disruptions; health & NegativeAvoidance towards in-store shopping and crowds; Job insecurity; Higher NegativeLower demand; supply chain realignment costs; and health & safety compliance costs
Consumer StaplesFood & Staples Retailing; Household Products, etc.NegativeSupply chain disruptions due to lockdowns or geopolitical issues; health & safety compliancePositiveHigher consumption enabled by SAH behaviour and online platformsPositiveHigher demand for products and services partly offset by supply chain realignment costs and health & safety compliance costs
Health Care
Health Care Providers & Services; Equipment & Supplies; Pharmaceuticals, etc.
NegativeCapacity constraints, Higher resource deployment to Covid-related products and services may hinder other BAU plansPositiveSignificant demand boost for preventative and curative products & services for both critical and non-critical ailmentsPositiveHigher demand for products and services
FinancialsBanks; Insurance, etc.NegativeDifficulty in raising capital; Increase in defaultsNegativeLower demand for debt from corporates (deferred capex) and consumers (job uncertainty)NegativeDue to demand and supply factors as mentioned
Information TechnologyIT Services; Technology Hardware, Storage & Peripherals; Semiconductors, etc.NegativeNo significant impactPositiveHigher demand for technology-enabled servicesPositiveHigher demand for products and services
Communication ServicesTelecommunication Services; Media; Entertainment, etc.NeutralNo significant impactPositiveHigher demand for data services, online entertainment services due to WFH/SAH. However, partially offset by lower demand for out-of-home entertainment servicesPositiveHigher demand for products and services
UtilitiesElectric Utilities; Water Utilities, etc.NeutralEssential service; No significant impactNeutralEssential service; No significant impactNegativeEssential service; No significant impact
Real EstateReal Estate Management & Development; REITs, etc.NegativeHigher compliance costs for Health & Safety, Slower project executionNegativeMajor realignment in commercial office and retail space demand due to WFH easeNegativeLower demand and higher project costs

Source: NXTanalytic Research

SUMMARY

The world as we knew it has changed. The very perception of what is risky and what is safe has been turned on its head. The Covid-19 pandemic has altered the way people work, relax, live and think.

The Covid-19 pandemic is the biggest global calamity since World War II. With nearly half of the world’s current population aged 5-35 years, this event has now been etched onto living memory for the foreseeable future. This will deeply impact how people behave as humans, consumers, employees and citizens. In this new reality, businesses must adapt to remain relevant and sustainable.

Considering the above factors, NXTanalytic Research believes that a new normal is beginning to emerge. In this new normal –

  • Availability of a vaccine is still some time away. Once available, swift and widespread distribution will be difficult to achieve
  • Consumers will live with the fear of contracting and spreading Covid-19 until widespread vaccination has been achieved
  • Travel, large crowds, physical socializing will be avoided over the longer-term
  • A general trend towards moving out of larger cities will commence
  • Digital transformation trends will accelerate and businesses will adjust to WFH
  • Businesses will be saddled with compliance costs of new health and safety regulations
  • Governments will face changes in consumer expectations and attitudes towards healthcare
  • Geopolitical risks will increase
  • Consumption driven economies, such as the U.S. and Canada, may witness turmoil while adjusting to the shift in consumer behaviour

NXTanalytic Research believes that risks faced by businesses in the ‘new normal’ are not being fully captured in the equity markets. The rally in benchmark indices such as DJIA and TSX shows that there exists a wide gap between market reality and the economic reality. The market reality neither represents the pandemic’s long-term impact nor the impact or length of the subsequent recession. A large number of companies are trading at premium valuations that do not reflect underlying business drivers. Moreover, many of these companies carry heavy debt burdens which may become increasingly difficult to service given the macroeconomic headwinds. Hence, the disconnect can only be explained by assuming that the equity markets are factoring in a ‘best-case’ scenario where there will be a V-shaped recovery once the immediate threat of Covid-19 recedes. We, however, believe that such a scenario won’t play out and that a re-evaluation of equity prices reflecting a severe, protracted economic decline will take place.

DISCLOSURES

Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?

No

Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?

No

Does NXTanalytic or the Analyst have any actual material conflicts of interest with the issuer?

No

Does NXTanalytic and/or one or more entities affiliated with NXTanalytic beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?

No

Has the Analyst had an onsite visit with the Issuer within the last 12 months?

No

Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?

No

Has the Analyst received any compensation from the subject company in the past 12 months?

No

This research report was prepared by NXTanalytic Inc., which is not a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. NXTANALYTIC IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS. The contents hereof are intended solely for the use of, and may only be issued or passed onto persons with which NXTanalytic has given consent. This report does not constitute advice, an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.

This research report was prepared by NXTanalytic, which is not a registrant nor is it a member of the Investment Industry Regulatory Organization of Canada. This report does not constitute advice, an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. NXTanalytic is not a registered broker-dealer in the United States or any country. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts.

All information used in the publication of this report has been compiled from publicly available sources that NXTanalytic believes to be reliable. The opinions, estimates, and projections contained in this report are those of NXTanalytic Inc. (“NXT”) as of the date hereof and are subject to change without notice. NXT makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and that contain information and opinions that are accurate and complete; however, NXT makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to NXT that is not herein. This report is provided, for informational purposes only and does not constitute advice, an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. Its research is not an offer to sell or solicitation to buy any securities at any time now, or in the future. Neither NXT nor any person employed by NXTanalytic accepts any liability whatsoever for any direct or indirect loss resulting from any use of its research or information it contains. This report may not be reproduced, distributed, or published without any the written expressed permission of NXTanalytic Inc. and/or its principals.

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Bitcoin was the third-worst performer last year as low cap altcoins showed the biggest returns

Looking at the top 20 cryptocurrencies by market cap (excluding stablecoins), altcoins showed the biggest returns leaving Bitcoin in the dust.
The post Bitcoin was the third-worst performer last year as low cap altcoins showed the biggest returns appeare

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Looking at the top 20 cryptocurrencies by market cap (excluding stablecoins), altcoins showed the biggest returns leaving Bitcoin in the dust.

According to Kraken Intelligence’s Crypto-in-Review report, the crypto market had a huge disparity in returns last year, with Shiba Inu (SHIB) amassing a return of 41,800,000%, while Bitcoin (BTC) recorded a return of just 58%.

And while these numbers might seem high when compared to traditional financial assets like the S&P 500 index, it’s important to note that Bitcoin was the third-worst performer of the 20 largest cryptocurrencies—well below the median return of 646%.

Bitcoin fails to leave a mark in last year’s performance metrics

Last year has been monumental for the crypto market. After a painfully volatile 2020 scarred by the global pandemic, 2021 started with tangible positivity in the air. It reinstated the macro bull trend in the market, bringing much-needed upward price action that revitalized the industry.

In its 2021 Crypto-in-Review report, Kraken Intelligence found that, as a whole, the market finished 2021 up 187%. And while this pales in comparison to 2020’s 310% return, it’s still miles ahead of 2019’s 58% return.

As a beacon of the broader crypto market, Bitcoin’s performance is always taken as an indicator of the de facto state of the market. Just like every year in the past 4-year market cycle, Bitcoin outperformed most traditional financial assets such as the S&P 500, the NASDAQ, gold, government bonds, and high-yield bonds.

However, while Bitcoin showed returns that are highly unlikely in the traditional finance market, its 2021 performance looks bleak when compared with the rest of the crypto market.

Kraken’s report looked at the top 20 cryptocurrencies by market capitalization excluding stablecoins and found that Bitcoin was the third-worst performing asset. Litecoin’s (LTC) extremely modest 16% return made it the worst-performing asset among the group, while Bitcoin Cash (BCH) posted returns of just 26% and was the second-worst in Kraken’s list.

The year’s outperformer was, unsurprisingly, Shiba Inu (SHIB) which removed Dogecoin (DOGE) from its throne as the king of memecoins. Launched in 2020, Shiba Inu amassed an astronomical 41,800,000% return in 2021—that’s 41.8 million for those unsure about the number of zeros.

The top 20 cryptocurrencies by market capitalization showed an average return of 2,240,000% and a median return of 646%. However, when excluding Shiba Inu and its unprecedented return, the average and median readings drop to 2,524% and 454%, respectively.

Chart showing the return for the top 20 cryptocurrencies by market cap, excluding SHIB

A 12-month long alt season

When accounting only for downside volatility, called the “Sortino Ratio,” Bitcoin remained the third-worst performing asset. The Sortino ratio is a variation of the Sharpe ratio that recognizes the difference between harmful volatility and overall volatility. This ratio is calculated by subtracting the risk-free rate from an asset and then dividing that amount by the asset’s downside deviation. As the Sortino ratio focuses only on the negative deviation of an asset’s return, it’s thought to give a better view of its risk-adjusted-performance. Just like the Sharpe ratio, a higher Sortino ratio result is better.

With a ratio of 1.5, Bitcoin ranked extremely low on the list. Litecoin remained an underperformer here as well, posting a ratio of just 0.9, while Shiba Inu’s outrageous return gave it a Sortino ratio of 35.1.

Polygon (MATIC), Dogecoin (DOGE), Terra (LUNA), and Solana (SOL) were among the top 5 cryptocurrencies with Sortino ratios that came in well ahead of the group’s average and median ratings of 5.3 and 3.5, respectively.

sortino ratio
Chart showing the Sortino ratio for the top 20 cryptocurrencies by market cap

Once the main driving force behind every movement on the market, Bitcoin seems to have taken the backseat in 2021. While Kraken acknowledged that Bitcoin had several historic moments during which it sustained revisions to its levels of dominance, it found that the trend in 2021 was defined by altcoins taking a greater share of the market capitalization.

One of the biggest obstacles to Bitcoin’s significant growth this year was the law of large numbers, which states that an asset cannot sustain the same growth as it increases in market capitalization. And with a market cap of more than $786 billion at press time, it’s hard to show the returns we’ve seen among the low-cap altcoins last year.

“The ebbs and flows associated with market participants shifting their preference for altcoins in favor of BTC and vice versa can help explain the short- and medium-term shifts in the market,” Kraken Intelligence reported.

Diving deeper into Bitcoin’s relationship with the rest of the market also shows another interesting trend—the decrease in Bitcoin’s dominance.

The year started with Bitcoin’s dominance sitting at just under 70%—meaning that 70% of the entire crypto market capitalization was locked in Bitcoin. However, shortly after the year began Bitcoin entered into a 5-month downtrend which ended June as its market dominance dropped to just 39%. According to Kraken Intelligence, this downtrend coincided with the broader market sell-off in May, which led to several months of slow rebounding for Bitcoin.

Throughout the second half of 2021, Bitcoin’s dominance was largely range-bound between 40% and 50%. This is a result of a rather interesting phenomenon—the majority of market participants see Bitcoin as a safe-haven asset within the crypto ecosystem. This view of Bitcoin means that most traders tend to trade back into Bitcoin to preserve their wealth and avoid drawdowns that hit altcoins the hardest.

The post Bitcoin was the third-worst performer last year as low cap altcoins showed the biggest returns appeared first on CryptoSlate.

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Economics

Top Energy Stocks to Watch in 2022 to Capture the Electrifying Growth

Despite being one of the worst-performing sectors over the past 10 years, the top energy stocks are now leading the stock market.
The post Top Energy Stocks to Watch in 2022 to Capture the Electrifying Growth appeared first on Investment U.

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Despite being one of the worst-performing sectors over the past 10 years, the top energy stocks are now leading the stock market. With inflation hitting a 39 year high in the U.S, cyclical stocks are back on top.

In fact, the Energy Select Sector SPDR Fund (NYSE: XLE) is up over 55% in the past year. Even more, the top energy stocks are off to a good start in 2022, pushing the ETF up over 13% so far.

After oil prices fell drastically when the pandemic first hit, prices are climbing back to their highest price since 2014. With this in mind, high inflation readings tend to benefit commodity stocks as investors look for less risk.

Not only that but with interest rates likely going up this year, crowded trades like tech stocks are getting clobbered.

Having said that, diversifying your portfolio with commodities can help buffer the impact. Keep reading to find the top energy stocks to watch in 2022 to boost your returns.

Top Energy Stocks for Growth Investors

Tech isn’t the only sector with growth leaders. Several energy stocks are leading the charge as profit margins are improving and more is being returned to shareholders. Given this, here are the top energy stocks for capturing growth.

Devon Energy (NYSE: DVN)

  • Market Cap: 34.5B
  • 1 Yr. Return: 167%
  • 1 Yr. Revenue Growth: 214%

Devon Energy is outperforming the market, making it one of the top energy stocks. It’s surging by 167% in the past year to lead the S&P 500 index. The oil and gas exploration company holds a diverse portfolio of oil volumes (50%), gas volumes (26%) and NGL volumes (24%).

However, DVN is making strategic moves to further its position. A few weeks ago, Devon merged with rival WPX Energy to create one of the largest shale producers in the U.S. Although the deal dilutes ownership, it will help boost cash flow with a larger presence in the Permian Basin.

More importantly, the company is using the excess cash flow to reward shareholders. For example, Devon announced a $1 billion share buyback program on top of a 71% dividend increase.

The company now pays a generous dividend yielding around 7% as DVN expects the growth to continue.

Diamondback Energy (Nasdaq: FANG)

  • Market Cap: 22.6B
  • 1 Yr. Return: 112%
  • 1 Yr. Revenue Growth: 165%

Diamondback Energy is another oil exploration company with an interest in the Permian Basin. So far, the company’s reserves include 58% oil, 20% natural gas, and another 22% natural gas liquids.

Like Devon, FANG stock is outpacing the competition, up 112% in the past year. Strong demand is pushing crude oil prices higher, helping boost the company’s cash reserves. Diamondback’s latest earnings shows the company has $457 million in cash. The company is planning to use the money to pay down debt and return to shareholders.

With this in mind, FANG is committing to a 50% free cash flow return for investors. The company pays a $2 annual dividend thus far, yielding around 1.6%.

Top Energy Stocks for Value Investors

The growth vs. value debate is an ongoing controversy among investors. Growth stocks have had the edge the past few years, but value stocks are outperforming growth so far this year. That said, here are the top energy stocks for value investors.

Exxon Mobile (NYSE: XOM)

  • Market Cap: 311.58B
  • 1 Yr. Return: 62%
  • 1 Yr. Revenue Growth: 58%

As one of the world’s largest publicly traded oil companies, Exxon Mobile, is involved in all aspects of the process. The company’s business segments include upstream, downstream, and chemical.

With gas prices increasing over their 10-year range, Exxon is seeing improved margins across all segments. Exxon also used the excess free cash flow in the third quarter to improve fundamentals. In light of this, XOM paid down its debt by $4 billion, bringing debt to capital to 25%.

Not only that, but this top energy stock distributed another $3.7 billion in dividends. With its latest dividend increase to $0.88 per share, the payout yields nearly 5%.

And on top of this, several investments are starting to pay off in Guyana and the Permian. The offshore projects are creating promising growth potential in the next few years.

Phillips 66 (NYSE: PSX)

  • Market Cap: 38.85B
  • 1 Yr. Return: 24%
  • 1 Yr. Revenue Growth: 90%

Phillips 66 is another one of the top energy stocks. It’s best known as an oil refiner. But the company is branching out into other revenues sources such as chemicals and midstream. So far, PSX operates 13 refineries in the U.S. and Europe with production capabilities of 2.2 million barrels of crude oil per day.

As more people get back to their everyday lives, gasoline demand rises. And as a refiner, PSX is at the heart of production. So, the higher demand is significantly improving earnings and margins.

Like the other energy companies on this list, PSX uses extra cash to improve its balance sheet. In the company’s Q3 earnings, PSX noted paying down debt by $1 billion so far in 2021.

Another key thing to note from the report, PSX is buying out all public partners. The move will help integrate the business while further improving margins.

PSX also offers an attractive annual dividend of $3.68 per share, or a 4.15% yield/

Risks to Consider When Investing in Energy Stocks

Although the stocks listed are up significantly in the past year, these are also the top energy stocks right now. Investing in the energy sector can be challenging with so many changing variables.

Having said that, the sector is heavily influenced by changes in the economy. When the pandemic first hit, oil prices cratered, causing businesses to take on more debt. You can see how easily things can change from March 2020 to where we are now.

Now that oil prices are recovering, we are seeing improving margins. And as a result of the extra cash, companies are reducing debt while rewarding investors.

The past ten years have not been very rewarding for energy investors. But, with OPEC capping supply levels, it looks like higher margins will continue this year. If demand remains strong, we will likely see much of the same in 2022.

The post Top Energy Stocks to Watch in 2022 to Capture the Electrifying Growth appeared first on Investment U.

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Economics

Friday’s Retail Sales Were Supply-Chain Positive

#CKStrong There was a lot of hang wringing over Friday’s retail sales coming in softer than expected. U.S. retail sales stumbled at the end of 2021, factory output weakened and consumer sentiment deteriorated at the start of the new year, … Continue…

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#CKStrong

There was a lot of hang wringing over Friday’s retail sales coming in softer than expected.

U.S. retail sales stumbled at the end of 2021, factory output weakened and consumer sentiment deteriorated at the start of the new year, illustrating a loss of traction for the economy that many analysts view as temporary.

Friday’s data deluge showed how lingering shipping challenges, supply and labor constraints, the fastest inflation in decades and the omicron variant are weighing on activity. – Bloomberg

Slowing Sales A Necessary Conditions To Fix Inflation And The Supply Chain

Au contraire, we use the differential of U.S. retail sales versus its pre-COVID trend as a good proxy of what is driving much of the problem in the global supply chains — that is, excess demand. Americans are buying too much stuff generating a massive traffic jam in supply logistics.

Take a look at the chart (last chart) below and see how out of whack retail sales are and how far above they are above its pre-COVID trend, which is, no doubt, inflationary and unsustainable.

We use the differential of current level of retail sales to its pre-COVID trend as a proxy of excess demand in global the economy. No doubt, there are real supply chain issues where factories close, say, due to sick workers from COVID, for example, but these are de minimis when compared to the massive gap between demand and supply, which is gummy up U.S. ports.

Bullwhip Effect

The volatility and unstable point-of-sale demand create havoc on the visibility of producers and upstream suppliers, who must forecast future demand. . Research indicates such high volatility in point-of-sale demand of, say, just five percent will be interpreted by supply chain participants as a change in demand of up to forty percent.

In such an environment, it is not uncommon for suppliers to panic, double and triple order, hoard, or attempt to secure some inputs in the underground market. In other words, hyperinflationary expectations and panic, to some extent, have taken over and swamped the supply chain.

Yes, folks, that is the type of behavior exhibited in hyperinflationary economies. I have lived it first hand.

To Produce Or Not To Produce

Moreover, producers have to decide if the demand they do see is real and sustainable and then determine whether to expand capacity accordingly to meet that excess demand.

Our priors are that producers’ perceptions are that much of the demand has been generated by the stymie money pumped into the economy over the past 19 months and is more or less temporary and the dominant expectation is that sales will eventually revert back to trend. Producers have been burned so many times in the past by misreading the spike in sales that were not sustainable and learned an expens lesson, getting stuffed with excess inventory and capacity.

Friday’s numbers confirmed, at least to us, that the initial stimulus is starting to wear off as the Fed prepares to reverse and begins to remove accommodation. Here’s to hoping they get the timing right.

No Pain-Free Way To Reduce Inflation

There is no pain-free way of ridding an economy of inflation. It’s difficult to measure how much the Fed needs to slam on the brakes, especially as the economy moves back to its natural trajectory without trillions of income support, all while it teeters over a fiscal cliff.

The Fiscal Cliff

Whatever, the case, the next year will be very interesting to watch how the economy and markets react to the Fed’s attempt to unwind its monetary experiment, which is unique and has never been attempted in a modern-day economy.

Finally, I think the pandemic will mark the point when economists stopped referring to supply curves, replacing the term with “supply chains,”which most macro analysts have very limited knowledge . About time.

Stay frosty, folks.

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