Market Musings 27/03/21: Demob Delight, 1 Year On
Demob Delight, 1 Year On
Summary:
- This week’s Podcast: The Shifting Sands of Consumption
- China: Buy on the Dip?
- Bitcoin: Bubble or Anti-Bubble?
- Vaccine progress in the UK, US marches on
- Cash savings have built up sharply
- Loosening purse strings in US, UK
- Who are the consumption winners?
New Podcast: The Shifting Sands of Consumption
In today’s podcast, Edmund and Charlotte address the topic of consumption.
The Shifting Sands of Consumption
- In the wake of the Coronavirus, how have patterns of consumption changed?
- What is pent-up demand?
- Is responsible consumption a growing trend?
- What are Millennials interested in
China: Buy on the Dip?
Interested in Chinese stocks? You could do worse than to read this article by my Singapore- and Hong Kong-based colleagues Prashant and Grace on why Chinese stocks are still attractive for the long-term.
- This is a long overdue correction triggered by a spike in US yields, concerns over China tightening and increasing regulations on China techs.
- Cyclical and structural factors are in place to drive the uptrend of domestic A-shares, Hong Kong-listed China equities, and select quality tech companies. Weaknesses are good buying opportunities.
China Equity Markets: Not Time to Lose Faith
Bitcoin: Bubble or Anti-Bubble?
For those of you who are interested in bitcoin or other cryptocurrencies, you may be interested by a recent article I wrote on the subject...
Attractions: Bitcoin offers a number of attractions to investors, including impressive returns since creation, absence of any central controlling entity, & a potential store of value against severe inflation or currency depreciation.
Drawbacks: Extreme volatility, small overall market size, dominance of supply by a small number of bitcoin “whales”, pseudonymous nature makes proper Know Your Client and other financial regulation difficult to comply with, risk of permanent loss from loss of pass-words or from exchange hacks; heightened regulatory risk from central banks, financial regulators, potential state-sponsored competition from new national “stable-coin” digital currencies.
Regulatory warnings: US and UK financial regulators have recently issued clear warnings regarding retail investor investment in cryptocurrencies and related derivatives.
Focus instead on the “picks and shovels”: we believe that investors would do better to focus on industries and companies that can benefit from the emerging crypto-currency and block chain ecosystem – including semiconductors, cybersecurity and fintech/e-payments.
Bitcoin: Bubble or Anti-Bubble?
Vaccine progress to speed reopening in US, UK
Vaccine progress marches on in the US, UK… I remain bullish on the prospects for domestic consumption in these two economies over the next few months...
Over 50% of the adult UK population vaccinated (at least 1 dose)
Source: The Guardian
In the US, President Biden has just upped his vaccination target to now 200 million US citizens vaccinated in his first 100 days of office, i.e. by the end of April. This is a good reason to expect strong US consumption - we are already seeing US households back in their cars more and more! This should be a good support for the oil price through the summer driving season this year...
Evidence of US reopening: Americans in their cars more and more
Source: gasbuddy.com
Cash savings have built up sharply
As a direct result of the partial closing of retailers, the ongoing economic uncertainty generated by the pandemic and the inability to travel abroad, household savings rates everywhere, particularly amongst those aged 30+. Note that the bulk of the rise in unemployment has occurred in the under-25 age range, nearly 70% of the rise in unemployment since the onset of this pandemic in the UK.
In Germany, as an example, household cash deposits held in retail bank accounts have soared to EUR2.6 trillion as of January.
As there are 41.5 million households in Germany, that averages out at nearly EUR63,000 in cash savings per household!
German retail deposits just keep growing
Source: Bloomberg
What makes this all the more astonishing, is that retail bank deposits offer virtually nothing to the saver, with an average interest rate today of only 0.25%...
While households will clearly keep some precautionary cash savings going forwards, I think that much of this extra savings will be spent in the coming months on one form or another of consumption, be it goods or services.
German average deposit rate at almost zero
Source: German Bundesbank
Loosening purse strings in US, UK
As vaccination rates rise sharply in the US and UK (Continental Europe unfortunately lags behind, for now), consumption looks primed to accelerate sharply open upon imminent reopening of these two domestic economies, starting in April.
In China, retail sales have already accelerated sharply since the start of 2021, driven to a 34% y/y surge in the short-term by extremely low COVID infection rates, the Chinese New Year and the subsequent Golden Week holiday.
In the US, household savings have been turbocharged by the mailing out of stimulus cheques by the US government to US households with annual salaries under $75,000.
Surge in US household income from stimulus payments in March 2021
Source: SRP
Who are the consumption winners?
What consumption trends look ready to benefit from a potential release of pent-up consumption in the next few months?
I look at two categories of consumption: firstly those structural consumption growth trends that accelerated during lockdowns, but which are likely to last in the future.
Secondly, there are those forms of consumption that should benefit from a huge rebound as people look to socialise once again, something which is a deep psychological need in all of us and which has largely been denied to us over the last 12 months, leading to a huge rise in the incidence of various forms of mental illness linked to isolation and loneliness.
In the US and the UK, I would focus on structural growth trends in:
- Video games and gaming computers and accessories;
- Online streaming entertainment platforms, both video and audio;
- Working from home accessories and communication services;
- 5G-related infrastructure and mobile phones, plus mobile gaming and entertainment services;
- Online retail;
- Online gambling and trading platforms;
In terms of the second category focused on fulfilling deep psychological needs:
- Pets and pet care;
- New trends in healthy nutrition including vegan/plant-based foods;
- Do It Yourself, including outdoor garden furniture and structures eg. gazebos;
- Hobbies including cooking/baking, learning musical instruments, gardening, board games and reading;
- Sports and fitness, including home equipment, athleisure wear and online training services;
- Online education including distance learning degrees, language learning and online programming courses.
In the US, I would point to video games (ESPO ETF), pet care (the PAWZ ETF), the Evolved Entertainment ETF focused on streaming and cable companies (the IEME ETF), as well as Home Depot (for DIY) and the BJK gaming ETF for online gambling.
US consumer-related stocks and ETFs that are benefiting
Source: tradingview.com
In the UK, we can focus on stocks such as Kingfisher for DIY (KGF), Gear4Music for online sales of musical instruments (G4M), Games Workshop for their Warhammer series of board games and figurines (GAW) and Pets At Home for pet care (PETS).
For healthy nutrition, I would look to the Rize Sustainable Future of Food ETF (FOOD), containing companies such as Deere & Co., Vitasoy and Beyond Meat.
I personally am more ambivalent about potential reopening beneficiaries such as Travel & Leisure, given the strong performance this sector has already enjoyed of late, combined with the ongoing risks of continued travel disruption and also the heavy debt loads that many travel stocks have run up over the last 12 months.
UK consumer-related stocks that are doing well out of lockdowns/reopening
Source: tradingview.com
But I do think that those bar and restaurant chains that have managed to survive through the last 12 months without taking on too much extra debt and which manage to reopen soon (e.g. by utilising outside spaces), could find themselves facing a surge in demand alongside a diminished competitive landscape, given the inevitable wide scale closures of many such businesses.
Best of luck for the week ahead,
Edmund
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13 comments
Thanks Edmund for the weekly thoughts.
I’m not especially bullish on millennial consumer spending, this demographic has been hit hard by the pandemic and are probably not flush with cash. The over 40’s on the other hand are probably going to splurge on cars, holidays, luxury, dining out etc.
The DIY shops have been busy for much of the past 12 months and with people returning to the office I reckon their sales will drop off in 2021. I suspect dog ownership will also fall and people will abandon their new musical instruments and Warhammer figures as they go back to normal life.
Restaurants will almost certainly get a temporary boost but patrons cannot exactly catch up on all those foregone meals. Takeaways will fall dramatically and the Deliveroo IPO looks like a total stinker. Seems like half the asset management industry have already turned their noses up at it.
Could not agree more re Deliveroo, looks like they are desperate to get the IPO away before revenue grow5th slows, and valuation multiples fall...
Also I am really not sure what the moat is that Deliveroo has in reality, with restaurants likely to tempt consumers to return to standard takeaways in person rather than Deliveroo/Just East. On top of that, people will surely want to go back to restaurants/pubs serving food, especially as the weather improves and they can sit outside. The social aspect is just so important for me, and that is what people really miss, and cannot get from any food delivery service.
Edmund
Hello. Great Article. Do you think the idea of vaccine passports will be enacted in the end and if so, will they have any/much effect on the hospitality industry?
Hi njoydev12,
Yes I think vaccine passports will be enacted in the end, but the willingness of countries to accept it may be piecemeal. Ultimately though, those countries that rely on tourist currency will be desperate to welcome foreign tourists back. My best guess is that we should focus on younger travellers as they seem to me to be most desperate to travel abroad, even if for a shortish while.
Then it is up to national governments like the UK to decide at which point they will ease the requirements for returning travellers, in terms of COVID tests and quarantines. For the moment, these restrictions seem prohibitively expensive...
For now, I prefer to focus on UK domestic vacations for this summer, and I think that UK hospitality (hotels etc.) can certainly benefit from this upswing in domestic tourism in the short term.
Edmund
Hi Edmund are you still bullish on oil for the medium to long term given the problems in Europe most likely meaning international travel will be moved to the back burner.
Hi again Clarea,
I am more comfortable with a medium-term bullish outlook on oil given the recent pull back, taking Brent crude back to $64/barrel.
I think that when the consensus is so pro-renewable energy (to the point where valuations are sky-high) and so ant-fossil fuels, but where electric vehicles will take a number of years to overtake ICE-powered cars, we could see higher oil prices at some point in the next few years.
Driving season in the US is likely to be very strong on oil demand, while travel will pick back up progressively over the remainder of this year, I think...
Edmund
Edmund. Thank you very much for your link to the article on China Equity Markets which answered many of my questions. The 15% correction dip must be close to the bottom now, even if it's not quite there. Probably time to think about topping up on the China A50 and Emerging Market ETFs. I'm also looking at Baillie Gifford China Growth Trust (LON:BGCG) which is trading 4% above NAV and bouncing along the 200 day MA. Currently priced at 29% below its 52 week high. Spread is 3%.
Hi again Wilkonz,
I also like to look at the JCGI and FCSS investment trusts, which have impressive long-term growth records.
Edmund
Hi Edmund
An interesting overview of likely future trends - I aim to listen to your podcast at some point. On another issue I posted a comment on the SCVR report a couple of days ago about the reported results from Atalaya Mining (LON:ATYM), the Spanish based copper miner that you spoke about on the virtual stock slam recently. I was a bit surprised at the copper realisations achieved given the dramatic increase in spot prices in 2020. Also the comments about future production, cash & AISC costs and additional mining developments (approvals, legal issues) didn't scream buy (it is on my watch list!) I would be interested in your thoughts given your knowledge of the company's operations will be deeper than mine.
Andrew
Hi Andrew
Well I spoke to the company recently about the legal issues the bulk of which have been resolved. There is an ongoing issue about a disputed amount of interest that Astor is claiming from Atalaya, but this is a relatively minor amount. The main payment to Astor by Atalaya in settlement of the prior acquisition has been made.
On the AISC, while it rose in 2020 andd is forecast to rise again in 2021,I am expecting it to fall in 2022 on a number of cost initiatives, most notably to improve the recovery percentage of copper. But I am not too concerned about this, as the estimated 2021 AISC of $2.50-2.65 is a long way below the current $4.08/lb price (which is around 50% higher than Atalaya's average realised copper price of $2.72/lb in 2020).
So yes the AISC is rising from FY2020's $2.21 level (gross margin of $0.52/lb is about 24%), but even at $2.60 AISC, Atalaya will hopefully generate a gross margin closer to $1.45/lb, i.e. c. 55% or more than 2x the 2020 level.
I think that the investment program the company is undergoing is raising the AISC for now, but I expect the AISC to stabilise or fall going forwards post 2021 on the back of their investment an cost cutting efforts.
Edmund
Hi Edmund
Great article as always. I am fairly heavy weighted in cybersecurity. I also feel the debt levels of travel and hospitality look critical in some cases. Rtn being one sp recovery that I find quite extraordinary. I did quite well in it pre pandemic but got out after I realised Wagamama could not be their saviour on its own. I am very interested in your ETF Food recommendation, which I will follow up. Have you heard of the New Agrarian Revolution? I recently read Jim Mellon's book Moo's Law on the subjects of meat grown from stem cells and of course plant meat substitutes. A new way of sustainable food production, reducing agricultural pollution and better deal for animals! Very optimistic about how we can steer the future onto a better course than we currently are on. ANIC is his investment vehicle into new food producers. Its pretty expensive at the moment (about six times nav) but some very exciting ventures with the fish cell producer hoping to come to market by end of year. I' am not invested yet but with companies like Beyond Meat sounds like FOOD ETF might be a good alternative. Best wishes Simon
Funnily enough Simon,
just listened to Jim Mellon on The Investors' Podcast, and he was very interesting.
Agronomics (LON:ANIC) is on my list to investigate on Monday!
Yes I have been looking into meat substitutes, particularly lab-grown ones. But up until now, not really anywhere outside of venture capital to invest in this emerging technology. I also liked his mention of a US company, BlueNalu for cell-grown tuna...
But I 100% agree with Mr. Mellon!
Best,
Edmund
Agronomics (LON:ANIC) has gone through the roof in the last month or so which put me off but I then realised that the Marlborough Uk Micro and Nano cap funds are both invested in it so there is a way to get exposure to it quite easily (and as I have both of those I felt a bit better when I realised that!!).