The Year in Review — Michael McTague

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December 2020 — Myth Buster

What a year for finance and everything else! Outstanding market performance stopped in its tracks. Roaring manufacturing and services halted. Initial Public Offerings (IPOs) froze. Pharmaceutical manufacturers and online retailers skyrocketed (“Miracle Cures Come in Small Packages”). Plans and expectations turned upside down for so many.

Consider the fissure between northern and southern Europe. As might have been expected, northern Europe outperforms the South. Unemployment insurance payments as well as the shrinkage of exports and day-to-day business stretches Italy to the breaking point.  A bailout may be in the works for the largest economy on the southern tier of Europe. As the fourth quarter moves along, the euro zone is reluctant to send cash to one of its founding members. A bailout for the home of Ferrari and other luxury goods might start an expensive domino effect across the massive euro zone.  

US stocks sank 11% in about two months but made a good comeback. IPOs came roaring back to lift 2020 to record levels of fundraising. Anyone interested in bonds would expect huge government borrowing as a reaction to cleaning up the financial disaster of the corona virus. Interest rates remain very low, which helps businesses and governments scrape up – and pay back – the needed cash infusions. More relief packages appear to be in the works. Investors will note that governments at all levels will be hard pressed to find the taxes they need to cover these mighty plans. 

The daily and weekly stock market spurts of hundreds of points show that the overall economy is alive and well even though investors remain on edge. Online retail has done quite well with Amazon and Walmart rippling along, balancing industries that dipped.

Tough Times for Countries Dependent on Oil

The “One Singular Sensation” series uncovered Russia’s weaknesses, the wealth of Saudi Arabia and Nigeria’s difficult straits. Shortly after the series ran, and as the Aramco IPO inched forward, the Saudis decided to basically gut Russia’s oil market. Dollars per barrel hit their lowest levels in many years. Saudi Arabia might have pulled this off, but then the two nations sitting on enormous oil pools got together and stopped the marketing blitz. If Aramco had gutted Russia’s connection with Western Europe, the economy of the former Soviet masters would have tanked with a terrible crash.

Without that event, oil in the incredible $20 per barrel range or even $40 means that Russia is in big trouble. The Federation’s GDP slipped 4% this year, a drop that follows years of declining oil prices. Relying on oil to cover your expenses proves a dangerous undertaking. Iran is undergoing 34% inflation in part because like Russia it depends too much on oil. Making an enemy of the US does not help either.

The series on Italy (“All Roads Lead to Rome” — Part I, Part II and Part III) shows the nasty split between the leaders in Rome and the euro zone bosses. The Myth Buster focuses on business and finance rather than politics, but increased spending — even to alleviate the dire coronavirus aftermath — put tremendous pressure on a nation already stretched by slow euro zone growth and rising debt. In years past, Greece was in the hottest water on the continent and had the interest rates to prove it. Italy is a more serious matter, however, because of its size. Greece’s national 10-year bond interest rate stands at a measly 0.69%, So, it is in line with fiscal responsibility, even austerity. Next year will tell whether Italy turns the financial corner.

A Scarlet Letter?

The series on Puritans grabbing control (“Power Tends to Corrupt and Absolute Power Corrupts Absolutely” — Part I, Part II and Part III) raised issues about government and business. Tight restrictions appear to anger some and please others. We focused on companies and industries that thrive in such times and found a surprising number that welcome the shift to working and shopping from home. Among the beneficiaries is a company that needs no financial boost, Microsoft, whose Azure cloud-computing business rang up a 48% increase in revenue in the quarter ended September 30. Casual clothing for those who work at home has leaped to new heights of wealth including sneaker maker Nike, which is at its 52-week high. Amazon, Netflix and Domino’s Pizza are thriving for obvious reasons and need no further attention.

In October, just a week before the attempted kidnapping plot was foiled, Michigan’s Supreme Court struck down Governor Whitmer’s effort to extend a “state of emergency” or a “state of disaster” by executive order. So, the Governor may be a confirmed Puritan, but the judges – or at least a majority of them – are not. But do not count the Puritans out. Tracking the private movements of people is rampant in Asia and finds governments armed with the latest spy devices.

P&G Rebounds

This difficult year saw Procter & Gamble reach a revenue turnaround. The subject of previous entries by the Myth Buster and the company most viewed by consultants and experts as a consumer bellwether, the parent of Tide and Bounty has done well as spring cleaning enjoyed an extension through the summer. For years, companies nibbled at P&G’s lead in detergent and other household goods. This year, however, the company rallied well. According to the major sponsor of afternoon TV dramas, “Organic sales grew 6%, with growth in 9 of our 10 product categories, and e-commerce sales were up 40% for the year.” In addition, earnings per share rose 13%. Investors are pleased that dividends went up 6% as of the end of the fiscal year. Sales in China rose also. (All of this means the fat lady is actually singing for the soap opera sponsor.)

So, a tough year comes to an end. The wealthier nations are recovering slowly from a giant punch to the solar plexus, while the world eagerly awaits vaccines for the current pandemic. The new year will bring its own challenges and opportunities. Next month will kick off a new Myth Buster series.

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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

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Equities Contributor: Michael McTague, PhD

Source: Equities News