Over 100 years ago (in 1909), EM Forster wrote a visionary and prophetic science fiction short story called “The Machine Stops,” which describes a future world where humanity lives underground and relies on a giant machine (like the Internet) for all communications and daily needs, etc. Each person lives in a room with a large screen, and the protagonist talks daily by this means to his mother in Australia, who eventually is persuaded to visit him by making a rare transcontinental journey.
The sudden global advent of the Coronavirus, COVID19, has accelerated the trend towards virtual work, study, and leisure. Children are staying home from school for up to 2 months, and doing ‘online’ classroom sessions. Office workers may permanently abandon their offices after 100 years of commuting, traffic jams, etc. (SARS in 2003 was the spur that accelerated the advent of online businesses like Alibaba and Tencent in China.)
The virtual world has arrived. The companies that benefit are, of course, the giant technology companies, such as Amazon and Alibaba, which guarantee home delivery of groceries, gifts, toilet paper, hand sanitizer, Clorox, and everything else. Even the videogame companies (Tencent) are seeing revenues climb, both in China and the West, as teenagers and others spend hours in their bedrooms playing “Minecraft” and so on.
There will clearly be great environmental benefits. The angst and rage of the climate change lobby will surely be assuaged as we stop taking planes, cars, and trains. The world will be a cleaner, quieter place; and economic growth will first dive into recession, then level off at a lower level. Markets have already anticipated this trend, with a 30% correction in 4 weeks (to mid-March) with a speed unprecedented since 1929 (that, too, resulted in fundamental changes in society and the economy). In fact, data for February in China show a 25.9% fall in industrial output and 20.5% fall in retail sales, while fixed asset investment fell 24.5%.
It is very likely that the oil price stays depressed for some time if aviation, and shipping, and transportation are in a permanent downshift. The outlook for other commodities remains uncertain, with China demand being a major factor. Although gold — we anticipate – will continue to climb steadily as QE, or even MMT (Modern Monetary Theory) becomes the new policy of central banks desperate to reflate, but with no interest rate weapons left. Even the USA has now reached zero; will it go below?
For Asia, it is a watershed. However, the strong financial position and ample reserves in China, S. Korea, Japan, Taiwan, Hong Kong, and Singapore will surely help them weather the storm, along with the proven rigour of virus testing and social controls, which has, for instance, resulted in Taiwan and Singapore having very few fatalities (and lower case counts).
So we anticipate that the economic recovery will start first in Asia, probably in the 2nd quarter; whereas, it will be summer before Europe and America begin to rebound from a steep economic recession. We are now looking for buying opportunities both in China and in India and Southeast Asia. Our focus will continue to be on e-commerce and healthcare rather than trade, tourism, or transportation.
Which other companies (especially in China) will benefit from this important new trend? In the US, it has been biotech and pharma (those researching for a cure or vaccine, such as Moderna and Gilead).
Also companies making face masks, hand sanitizer, etc. Some grocery chains, which provide essential daily supplies (Whole Foods, now 100% owned by Amazon). Campbell Soup, Clorox, Johnson and Johnson, utilities, and other basic supplies. Avoid airlines, hotels, restaurant chains, and office renters and developers.
The decision by the Trump Administration to send $1,200 cash to every US citizen (with income less than $99,000), and $500 for every child, marks finally the arrival of “newly created money dropped from helicopters,” described by Milton Friedman years ago. (The UK is espousing a similar policy.) It will clearly alleviate the pain of those working in travel, food, leisure, sport, and retail – and is a compassionate policy for hard times. But it is also a radical economic idea (is this “tax payer’s money”?) It looks like a Universal Basic Income, as advocated by progressive socialists, but introduced by (Republican) Donald Trump and (Conservative) Boris Johnson.
It will boost demand, and, perhaps, inflation. It will depreciate the value of savings. Instead of receiving an income from your labour, or from your capital (in the form of interest and dividends), you will receive an income merely for being alive. It is the ultimate welfare “Big Brother” state.
Investors in this environment, and with zero interest rates, should definitely own gold, which we expect to exceed its old high of $1,800/ounce. Inflation-linked bonds might also do well.
At the lowest point in March, the S&P was down 30% from its high on February 19th, the most rapid decline since October 1929. Apart from a few stocks like Zoom (+130%), Netflix, and Gilead Sciences, all stocks are down (especially cruise lines). By contrast, the Shanghai market is only down 12%, and Asia ex-Japan, about 18% this year.
By March 30th, there were nearly 800,000 cases of the virus worldwide, and over 35,000 dead: Europe’s infections are now peaking, whereas the US numbers are just beginning to rise. Also, over 3 million Americans applied for unemployment last week, and some expect 20% to 30% unemployment (worst since 1932). There are dire forecasts of 500,000 deaths in the UK and 2 million in the USA, if no “mitigation” or social distancing, or stay-at-home policies are enforced. But they will be, and we are more optimistic, that in 2 months, the worst will be over. Markets will scent this outcome early on.
China has begun to recover from the Coronavirus, which first spread widely in mid-January, and led to a 10-week shutdown. Factories are reopening, and most Chinese are back to work. Export demand, however, will remain very weak. Our best hope is that the US and Europe will recover from this short-term depression by the end of May/early June, and this should indicate a bottom for the market in the next few weeks. Asia has, in our view, seen a bottom; and the best shares – in technology, pharma, insurance, e-commerce – are now in a buying range.
April 1st, 2020
[from a “Virtual” Hong Kong]