Genus Weekly In Focus – Addressing COVID-19 Concerns Week-33

Thomas Holloway: [00:00:04] Hi, everybody, my name is Thomas Holloway and I’m a portfolio manager at Genus Capital, and welcome to the weekly video.

Justin Hahn: [00:00:12] Hi, I’m Justin. I’m the Macro Researcher Analyst for Genus Capital. Welcome.

Thomas Holloway: [00:00:18] All right. So I’m going to I’ve got a few questions this week for Justin. Let’s kick it off, Justin, with what happened this week.

Justin Hahn: [00:00:24] So this week, we saw the markets fall with heightened volatility due to the uncertainty heading into next week’s elections, economic numbers out of the US were better than expected, supporting the view that a recovery is taking place. We also saw a lot of earnings from the big tech names such as Facebook and Google, which were mostly in line with expectations. However, they were under pressure from regulatory fears, as well as some fear, some pressures from the user base growth side on the covid front. Germany and France were headed for another lockdown for the month of November, but there are some positives coming out of the vaccine front.

Thomas Holloway: [00:01:00] Ok, thanks for that report. How about oil prices? There was a lot of excitement with oil prices earlier this year. I think they’ve kind of come back a bit. But what’s our forecast there and how do we think about that?

Thomas Holloway: [00:01:12] In general, we expect oil prices for this year at least to hover around the 30, 40 dollar range it’s been hovering around so far. Currently, our models view it as neutral. The concern regarding a second lockdown and the lower oil demand are present. But it seems like a lot of these countries have learned from their first lockdown and they’re deciding to keep some of the factories open, which is good news for oil. Longer term, we still see oil range bound as well because of the digital economy and how and how it has changed people’s lives. There’s likely to be less travelling, whether it be for leisure or for business, due to the conferences moving online, as well as people being reluctant to travel or travel on planes.

Thomas Holloway: [00:01:53] And that makes sense, thanks. You mentioned in your intro that it was a busy week for earnings. What stood out for you and what are you keeping an eye on?

Justin Hahn: [00:02:04] So, yeah, yesterday was a big day for a lot of the big earnings. We saw the Fang names, the Facebook, Google, Amazon, Twitter, those guys report their earnings, which were broadly in line with analyst expectations. We also saw continued strength in earnings from last quarter, particularly for Amazon, with the increased demand as people are still at home and trying to set up their work from home, as well as taking classes from home materials. Overall through guidance in that sector was slightly lower, especially in the social media sector, due to the regulatory issues that are going on that I mentioned before, as well as the user base being almost capped out at this point. And companies are going to have to look elsewhere, more globally rather than the US for that user growth.

Thomas Holloway: [00:02:51] Yeah, one incredible item I noticed, I actually read this on Twitter, but Apple, of course, has been a huge winner over the last five years, up something like 30 percent per year for five years in a row. But the operating earnings of that company are actually relatively similar to what they were five years ago. So how did they manage to return such incredible shareholder return? Part of it is that they’ve been buying back a lot of their stock, so there’s fewer shares outstanding. And the other piece is that the market values those shares more highly per dollar of earnings than it did five years ago. OK, so flipping over to more of the macro news, another piece of information we got this week was U.S. GDP. From me, you know,  GDP is released. It’s a little bit backwards looking by the time you get it, it’s about a month old, but nevertheless, still a really important number for everybody. So how did that shake out?

Justin Hahn: [00:03:43] Yes, so for the third quarter, GDP for the U.S. came in slightly higher, growing at almost thirty three percent on a quarter over quarter basis ahead of the consensus. Thirty one percent. We also saw Canada today report their August numbers, which were slightly higher than consensus, growing at about one point two percent. We’re still slightly below on Canada and the US pre covid levels, with us being about three ish, three to four percent on the year to date number. But the recovery was very sharp with thirty three percent.

Thomas Holloway: [00:04:13] Great. One point I wanted to make about that is that 30 percent growth sounds a little bit crazy. And so just to put that in context of the way that works is it’s a quarter over quarter number, which is annualized. So I think the right way to read that is it’s about seven and a half percent growth from the quarter over quarter and then you multiply by four to make it annualized. And of course, what we had is about a seven percent down and seven percent back up again. So we’re starting to approach roughly the GDP that we had pre-COVID, give or take. So that 30 percent number, while it sounds exciting, definitely reflects a snapback, as Justin explained. OK, so I mentioned that GDP can be a little bit slow moving of a data point. Is there anything that we can look at that’s a bit higher frequency?

Justin Hahn: [00:05:02] Yes. So the U.S. releases weekly job numbers, usually on Thursdays. So yesterday we saw that the US is initial jobless claims were slightly ahead of the consensus, only at about seven hundred fifty thousand. This is the second best print that we’ve had since the pandemic. Layoff jobs are slowly returning to the workforce with some spaces, particularly in the tech sector even expanding and growing and increasing their workforce, which is a very good, positive sign for the economy.

Thomas Holloway: [00:05:29] Ok, so in terms of specific investments in the portfolio, a big dichotomy that we’ve been talking about for seven months is the kind of the covid winners and the losers. That theme has been playing out for a while, whether we have another lock down or not. Can the winners keep on winning? Is that dichotomy still going to be important going forward?

Justin Hahn: [00:05:52] So we believe, yes, the covid winners will still be able to make money during a forced shutdown or even when the economy opens up and still will probably make more money going forward. The way covid has changed, people’s daily routines and people’s lives will only benefit these companies more. We are seeing a partial or full adoption of work from home policies for many companies, especially in the tech sector, and even spreading out to other sectors as well. This is because the changes in work from home technologies are making it much easier for people to work from home. And as well, in addition to this, we also see a lot of universities, as well as other schools taking our learn from home approach as well, which will definitely be benefiting those companies.

Thomas Holloway: [00:06:35] Yeah, that that reminds me of an item that I saw in the earnings this week from Microsoft CEO Satya Nadella pointed out that covid or not, basically every business is looking at digital transformation and the next 10 years of economic progress really will be defined by digital transformation. That was probably already happening, certainly something we’ve already been talking about. But covid, of course, accelerated that. So not the first time you heard that story, but definitely reinforced this week with some of those anecdotal comments, right? Well, I think that’s all the questions I have for this week. Really appreciate that insight. Thank you. Thanks, everyone, for watching. Have an awesome Halloween however you celebrate it. And don’t forget that you can feel free to reach out to any portfolio manager with your questions, either for next week’s video or for your own information. Thanks so much for watching.

Justin Hahn: [00:07:24] Thanks, everyone.