At a time when conflicting voices are raised as to when full recovery will arrive, we are pleased to present below a summary of four articles with unique insights that may have an impact on our lives and portfolios in the medium term.

Staying Home: How the Coronavirus Changed Consumer Behaviors and Company Valuations

David Sekera, Morningstar
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While the long-term economic implications of the pandemic will likely be minimal, in the short term the coronavirus has accelerated the adoption of several pre-existing consumer trends. The first of these is telework. By the peak of the pandemic lockdowns, 45% of US workers were working from home (up from 9% prior to the pandemic), an experience both employees and employers report went “better than expected.” According to many surveys, more than half of employees would prefer to work from home either full-time or at least more regularly. This shift has led to the adoption of several new technologies, including communications platforms, offsite network access, and innovative internet architecture. Meanwhile, shutdowns and social distancing requirements led to a drastic reduction in many services. The travel industry took a massive hit as consumers cancelled vacations, reduced personal and commuter traffic, and generally stayed home. Energy suffered from this lack of movement, with oil prices plummeting. Restaurant revenues remain 40% below pre-pandemic levels, and with ongoing restrictions that number is unlikely to improve any time soon. Many restaurants will need to shift their focus to an online presence or risk closing their doors permanently. That said, online sales have grown rapidly in the pandemic era, with a 22% increase from February through September. This has accelerated the growth of the best-known technology stocks, with the top 6 rising an average of 42% from January through September. Traditional retailers who successfully navigated the online wave (such as Walmart and The Home Depot) also saw increased traction in their digital markets. Less savvy retailers have seen their market share slip, with some traditional mall anchors (such as JC Penney and Lord & Taylor) already filing for bankruptcy. While investment opportunities exist within all these trends, investors should practice caution as they make decisions, as the markets have a propensity to overestimate the success of trend winners and underestimate the long-term resiliency of trend losers.

Final Countdown to US High Stakes Election

Economist Intelligence Unit
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The November 2020 presidential election is “a battle for the soul of the nation”, according to 75% of respondents in an Ipsos poll conducted in September. It is possible that this high-stakes election results in an intense election dispute. As of now, a Biden victory seems the most likely outcome, but unless his victory is emphatic, it is likely that Trump will dispute the outcome of the election. Though we should approach polls with some caution given their poor prediction of the 2016 election, Biden has consistently held a wider lead over Trump in national polling than Clinton did in the last presidential election. Similar to 2016, the outcome will probably be decided by a few key swing states, namely Michigan, Wisconsin, Pennsylvania and Florida. 

How could an election dispute play out? The Economist Intelligence Unit predicts Trump to take an early lead as in-person votes are tallied and reported first. Because of this, Trump may prematurely claim victory. However, Biden could quickly take back the lead as postal votes are counted over the following week. If this is the case, Trump is likely to claim widespread fraud in the postal ballot system which would lead his lawyers to launch lawsuits in key battleground states. The dispute itself could end up before the Supreme Court or Congress. A Supreme Court ruling on a recount would not be enough to end the dispute because the losing candidate must formally concede. This creates the possibility that Trump could continue to challenge various state results well into January 2020, running the risk that no winner is identified by Inauguration Day. The dispute could end up before Congress if state authorities disagree amongst themselves about the outcome of the local vote. In this case, states would send a slate of electors to the Electoral College to vote on behalf of the state. In the worst-case scenario that no winner is agreed to by Congress and Trump refuses to leave office, the Democrats would probably refuse to move the legislative agenda forward until there is a resolution, therefore leading to a government shutdown in early 2021. However, given the social unrest that would ensue as well as the country’s ongoing struggle with economic fallout of the pandemic, this worst-case scenario is very unlikely and we can expect one candidate or the other to back down before Inauguration Day. What is certain is that this election will be one for the history books. 

Eurozone budget deficits rise almost tenfold to counter pandemic

Martin Arnold and Sam Fleming, Financial Times Read the full article here

The Eurozone has racked up an aggregate fiscal deficit of nearly €976 billion which is equal to 8.9% of gross domestic product (GDP) this year and almost ten times higher than last year’s levels. Investor and policymaker attitudes towards the extraordinary deficit have been much more relaxed as compared to the previous peak in eurozone deficits in 2010 which ultimately led to the eurozone sovereign debt crisis. At last week’s annual meetings of the International Monetary Fund (IMF) and World Bank, senior officials urged countries to borrow heavily to tackle the pandemic instead of the usual call for austerity. Early on in the crisis, the European Commission suspended the stability and growth pact, rules designed to ensure that EU countries have sound public finances, and said the restrictions would not be reimposed until 2022 at the earliest. As Covid-19 cases surge across Europe and prompt a new wave of government restrictions, fears of a double-dip recession have been raised. Though EU ministers will eventually have to deal with the suspended fiscal rules, there seems to be no desire among ministers to enact a fiscal clampdown or reverse the debt surge. 

Europe’s ‘Three Seas Initiative’ Aims to Curb Chinese Influence

Deutsche Welle
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The Three Seas Initiative is an ambitious forum of 12 European Union states around the Baltic, Adriatic, and Black Seas which aims to develop infrastructure in Bulgaria, Estonia, Croatia, Latvia, Lithuania, Austria, Poland, Romania, Slovakia, Slovenia, the Czech Republic and Hungary. Considering that the member nations comprise 28% of the EU’s territory and 22% of its population while contributing only 10% to its GDP, there is much potential in the project. The US has promised to contribute $1 billion to the project’s funds, seeing the initiative as an avenue to curbing China’s influence in the region. With the coronavirus pandemic revealing some of the risks associated with moving production to Asia, the initiative’s member states have been more willing to cooperate with the US. Several nations have signed the US 5G Clean Network Security program, a US-led effort to prevent China from gaining access to critical European communications infrastructure. In addition, the Three Seas Initiative provides opportunities for energy security, as access to US liquified natural gas decreases reliance on Russian energy for several members of the group. Despite these multilateral movements, political divisions remain in the Initiative’s members, especially in regards to Russia. These divisions have effectively neutered the group’s ability to speak as a cohesive unit, constraining cooperation to economic projects. This style of cooperation has opened the door for the US to exert influence in Europe.