As Covid-19 cases are rising and many countries experience record heart-breaking numbers of new infections, hospitalizations and deaths, and while we are awaiting the production and distribution of vaccines, we would like to share with you below a summary of four articles with unique insights that may have an impact on our lives and portfolios in the medium term.

Next week Covid-19 and the Day After will be sent out on Wednesday due to the Thanksgiving holiday.

A Covid Vaccine Is Coming. Here’s What It Means for the Stock Market.

Andrew Bary, Barron’s
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Favorable news on a coronavirus vaccine has injected the markets with a new round of optimism, including renewed hopes for a long-awaited rotation into value stocks (see Tuesday’s commentary). A strong economic recovery is expected to benefit small and international stocks due to their economic sensitivity. Value stocks have traditionally outpaced their growth counterparts coming out of recessions, but have underperformed growth stocks for several years. Much of the bullish sentiment for this segment is reliant on a strong recovery and a swift vaccine; a setback for either assumption takes the wind from the sails. Still, once the thrust of the pandemic is behind us, small caps, international names, and value stocks should see outsize support, with gold providing a hedge against inflation and central bank risks. Many names in the financial, drug, and energy sectors are currently trading at low multiples, making them attractive targets for a post-pandemic value shift. As investors look to the day after Covid-19, the thesis of value investing – that one can buy future value for a present discount – remains valid.

America’s Zombie Companies Have Racked Up $1.4 Trillion of Debt

Lisa Lee and Tom Contiliano, Bloomberg
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Since the onset of the pandemic, nearly 200 companies have joined the ranks of the “zombie companies” – firms who don’t generate enough earnings to cover their interest expenses, a designation that covers nearly 20% of the largest 3,000 US companies. With a total debt of about $1.36 trillion, the plight of the zombies is nearly double the magnitude of what it was during the financial crisis in 2008. Some see the Fed’s swift intervention in purchasing corporate bonds as an anchor weighing down future growth, inadvertently diverting funds to companies that otherwise would have gone out of business. While zombie status is not a death sentence the amount of money tied up in the debt cycle typically prevents the kind of spending necessary to grow and adapt. Even the companies that do claw their way out are likely to see long-term weakness and are more likely to fall back into zombie status than other companies. While the incidence rate and ensuing severity of zombie companies varies by classification method (with some metrics showing a much lower number of at-risk companies), there remains the as-yet unanswered question of how the post-pandemic recovery will be shaped by the mountains of corporate debt. As companies begin to de-leverage following the crisis, a period of slow growth, subdued inflation, and low rates is likely to follow.

Was hyperglobalisation an anomaly? 

Claire Jones, Financial Times 
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From 1986 to 2008 was a period of exceptional growth in trade’s contribution to global GDP. This period of “hyperglobalization” was primarily driven by three factors. First, the fall of the Soviet Union freed up a respectable percent of the world’s population that previously did not have access to global markets or the ability to migrate. Second, the rise of China and India, whose populations made up 38 percent of the global population in 1990, opened up access to ultra cheap labor markets. Finally, various multilateral and regional trade agreements were signed during this period, creating the perfect “recipe for rampant globalization.” 

So, what comes next? Over the last few years, we have seen sluggish growth in global trade, which some people call “slowbalization”. The trend is likely to continue, but some argue we will see regression whereas others believe we are in for a period of retrenchment. The nature of trade is sure to change, especially after the shock the Covid-19 pandemic has dealt to global supply chains. On the regression side, Harvard University’s Pol Antràs says the pandemic’s impact on global supply chains is a temporary shock and that industry’s resilience should not be underestimated. Susan Lund of the McKinsey Global Institute, also on the side of regression, says the nature of trade will change resulting in greater trade in services and less focus on exports, but does not expect retrenchment. On the other hand, the author argues we will experience more retrenchment than Antràs or Lund expect. China’s new “dual circulation” model which focuses its economy on building domestic demand, is cause for concern. Furthermore, the policy climate remains uncertain and barriers to services trade are far more significant than for manufactured goods. 

Banks in Europe Face Potential $1.7 Trillion Covid-19 Cliff

Patrick Kowsmann and Margot Patrick, Wall Street Journal 
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Bank executives and regulators are concerned that a wave of bad loans could overwhelm European banks when government rescue packages come to an end. The unprecedented levels of government stimulus, which have included repayment moratoriums, have held up households and businesses during the pandemic. The European Central Bank says bad loans could reach as high as $1.7 trillion if European economies fall more than expected. If banks are suddenly overwhelmed with defaults, they could very well run out of capital which could lead to bank failure or require government bailouts. However, it won’t be until the moratoriums are lifted that we get a clearer picture. Matt Long, head of capital markets for Europe at Accenture, said “At the moment the biggest bank is governments. When that stops, that’s when we get to see the real ability of the borrowers to pay back the loans and meet their borrowing commitments.”