Macro Thoughts

May 10, 2021

Globally, Covid is still an unknown variable for the economy. Vaccine progress is strong. The WHO just approved China’s Sinopharm vaccine. This shows that there is continuing progress being made on the medical research front. In the US, Covid is under control for the most part. Herd immunity is rising, and we should be at a level of herd immunity that allows our economy to function without Covid constraints in the very near future. A risk of not enough people being vaccinated to achieve herd immunity does loom over the recovery progression, but many states that are having that problem are offering incentives that are enticing people to get vaccinated that may not get vaccinated otherwise. One thing to keep in mind is that the US economy cannot fully recover until the global economy recovers. This is the case in terms of both global trade and the virus progression. We are seeing inflated prices in a number of goods now due to supply chain bottlenecks. A further global recovery would relieve many of the bottlenecks we are being faced with now. Virus recovery is important on a global scale because the longer Covid remains out of control, the higher the risk becomes of more mutations developing that could permeate across borders. Globally, many of the regions being hit hard by Covid right now, particularly India, do have several characteristics that make the Covid surge less harmful to their economy compared to developed nations. Primarily, they have a much younger population. As we know, Covid is mainly a risk factor for individuals that are 50 and older, more so for those 65 and older. As Covid has surged in these regions we have not seen much of a slowdown in their economic output. This is evidence that a younger population is more advantageous in the fight against Covid.

This brings me to another thought – demographics are much stronger in emerging markets than they are in developed markets. It is highly anticipated that we will see significant economic development in these regions. There are a number of developments that will occur due to this. Many of the amenities that developed nations have had as common place for many years aren’t so common in many of these emerging markets. HVAC, specifically air conditioning, for example, is an industry I expect to see significant growth over the next several decades mainly driven by emerging market demand. HVAC companies that have a footprint in these regions will be big beneficiaries of this trend. There are a number of other industries that will benefit from this global growth. This is an area I am still contemplating further.

Covid has brought on an increased tech reliance. Many of the tech companies that have benefited from Covid are here to stay. Many of the major tech companies have developed even larger moats now because of the Covid shock. These companies do face political risks as a consequence of their success, but I think many of the political risks will not have a notable impact on their long-term profitability. This tech reliance has created a strong demand for semiconductors which has in turn created a semiconductor shortage that the world is facing. As The semiconductor industry is going to be an industry where we will see high demand levels for the foreseeable future.

As we see increased global economic growth, another beneficiary of that is the energy sector. Much of the world is making an effort to make the switch to more sustainable energy solutions, but it is very evident that the growth of sustainable energy production is going to be significantly outpaced by the growth in the demand for energy. I believe we will continue to see global growth in oil demand as well as coal demand. The US will be a contributor to this growth to some extent, but I expect the majority of this growth will come from outside the US.

Vehicle electrification is a hot topic in business media now. We will most definitely see significant growth in electric vehicle production and adoption, but I think it will be a much slower transition than many people think. An interesting point that Elon Musk made in Tesla’s last earnings call was that the current electric grid in the US would not be able to support every vehicle in the US being electric right now. Significant advancements need to be made in the electric grid in the US as well as globally for electric vehicle adoption to really see notable growth.

A big theme I see in relation to these trends is that there has been widespread underinvestment in commodity sectors over the past decade. This will be very supportive of energy prices and metal prices. Metals that play in role in the electrification trend, primarily copper and to a smaller extent lithium, are likely to see long-term price appreciation. Materials companies that produce metals that will be utilized in the electrification expansion should have strong performance in this part of the cycle.

The overall recovery from the Covid crisis is progressing well. The unprecedented levels of fiscal and monetary support are likely to continue to bolster financial markets and the overall economy. The Fed is maintaining a loose monetary stance and there is no evidence of that changing in the future. I remain optimistic despite the risks looming on the horizon.

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