Research Publication – The COVID-19 Webinar – Musical Chairs – Episode IV

RFM updates its COVID / Technology coverage with the publication of The COVID-19 Webinar – Musical Chairs – Episode IV. RFM subscribers will receive their copy of the research by email or secure download. 

For a change, most of the good news is health-related as the economic fall-out is only just beginning. The combination of vaccination and low mutation has caused fatalities to fall dramatically and RFM thinks that the 2021 virus season may be little more than an inconvenience. However, national debts and money printing have continued through the winter and the market beginning to price this in with rising interest rates. If these are allowed to continue they will badly damage the very high valuations present in the stock market that is driving the current EV and SPAC crazes.

• Pandemic passing. By most accounts, the pandemic is on its way out at least until Q4 2021 when there will inevitably be a resurgence. Vaccination is going well in both the USA and UK but Europe is struggling.  However, the collapse in all-cause mortality indicates that at least, the most vulnerable are being vaccinated. With the vulnerable vaccinated going into Q4 21, the next respiratory virus season may be little more than a minor inconvenience.
• Fatalities are plummeting. In Europe, deaths have fallen from a weekly peak of just over 80,000 to 55,000 and there is no sign of it slowing down. The vast majority of these (circa 90%) are still in the over 65s and this new level is well below the 5 year historic level of all-cause mortality that is typical at this time of year.
• Mutation and the emergence of variants are also likely to fall substantially. Although these types of viruses mutate quite quickly, the data is pointing to SARS-Cov2 mutating more slowly than influenza that preceded it. This will mean longer-lasting immunity for those who have either had the disease or been vaccinated.
• Money supply & interest rates. Unfortunately, while the pandemic crisis is coming to an end, the economic fall-out is just beginning to bite. Relentless money printing is leading to inflation which is why long-term interest rates are rising. The debt load is now so great that governments cannot afford to let interest rates rise and so they are very likely to be forced to intervene yet again. This will kick the can down the road for a while but in the process make the problem itself even larger.
• Semiconductor shortage can be traced back to the early stages of the pandemic when automotive demand collapsed. Some semiconductor capacity was furloughed and the rest switched to consumer electronics which performed very strongly with everyone working and learning from home. Tier 1s failed to place orders in Q3 2020 meaning that the stronger than expected recovery led to severe inventory declines which are now exhausted. More generally, the China trade war and supply chain uncertainties have caused a lot of component buying for inventory which combined with sustained demand is why shortages have spread across the industry. RFM expects this will sort itself out in a few quarters as inventory buying eases, supply chains stabilize and the world goes back to work.
• The SPAC craze has resulted from the wall of printed money coming into the equity market seeking yield as there is none to be had from government bonds. SPACs have been around for a very long time and it is not the SPACs themselves where the irrationality is to be found but in the valuations at which these transactions are being effected.  Currently, this one of the cheapest ways to raise capital but the outlook for these companies to hold their valuations once reality reasserts itself is very poor indeed.
• Social capital is what is likely to prevent working from home from becoming a permanent fixture. Social capital is the network of relationships that allows a business to operate effectively and is created by in-person contact. It is this capital that has allowed remote working to be so successful but it is being depleted as workers stay physically apart and staff turnover returns. This is why RFM believes that a wholesale return to the office, commuting and city living is likely in the short to medium term.
• Valuations have corrected somewhat but remain way above what they should be given the economic outlook. The expectation of a recovery in profits in 2021 has brought the forward PER ratio of the S&P500 index back to 22.8x for 2021. This is still very high considering the weak economic recovery that is now likely to occur. RFM thinks that the rotation from growth and the technology sector into value will continue unless the rise in interest rates is stopped and reversed by Fed money printing.