W.HICHCompany Who emerged as the winner from the last three years of turmoil? The spring of 2020 began perhaps the most extraordinary period for business as lockdowns brought some production to a halt. A deep but brief recession was followed by a desperate recovery. Then came inflation. The global economy, already stuck in a fast cycle, is now experiencing the fastest interest rate rise since the 1980s. Bank Morgan Stanley’s Graham Secker argues that the policy response to covid-19 has shocked the economy and pulled it out of secular stagnation (the low growth, low inflation malaise that preceded the pandemic), new era.
It should come as no surprise that the business environment has changed dramatically. To examine this, we looked at which American industries and companies have performed best over the past three years, based on stock market performance. The headline is a dramatic reversal of market leadership.of digital rabbit Stepped into the turtle of the old economy.big tech is I won’t run away anymore with race. Companies that were once ridiculed as outdated and stagnant suddenly seem to come alive again.
We chose 01/01/2020 as the starting date for the analysis. Since then, S.&P. The 500 index of major US stocks rose 25%. The best performing industrial sector is energy, followed by information technology (that). Health care is doing well, as expected during a public health crisis. S.&P. 500 is Moderna, a major vaccine maker whose stock is up more than 800%.
Industrial companies are keeping pace with the index, as are consumer staples. Firms that service the discretionary portion of consumer spending and are impacted by inflation are lagging behind. The worst performing sectors are real estate, banking and telecom services (see Figure 1). At the bottom of the performance league are cruise line companies such as Carnival, whose debt has skyrocketed and their stocks are anchoring to the bottom of the ocean.
Measuring performance in stock prices has its drawbacks. It’s hard not to see the rollercoaster ride of Tesla’s stock (up 556%) without considering the impact of changing investor fads and risk appetite. But over time, business success is built into the market price. It also helps us understand how investor perceptions have changed over time. To capture this, he divided the period into three phases. Stay home period, reopening period, and now inflation period.
The hallmark investments of the pre-pandemic era of secular stagnation were companies with low assets. Primarily software companies that benefit from network effects, but also include branded goods companies. Firms based on ideas and information were preferred over those relying on physical capital. The deal was to buy ‘bits’ and sell ‘atoms’.
The first part of the pandemic amplified these trends. The stay-at-home phase lasted until November 8, 2020, the day before test results for the Pfizer vaccine were announced. The big winners were Technology, Consumer Discretionary (Amazon up 79%) and Communications Services (Netflix up 59%). The losers were real estate, banking and energy. There is a bit of a mystery to this. People were stuck indoors, relying on software and shipping. The office was barely occupied. There was very little car or air travel (bad for the oil companies). Banks were also hit by falling interest rates and fear of default.
The next phase of the reopening saw a shift in leadership. Energy was the biggest winner, followed by finance (fueled by optimism and rising asset prices), technology and real estate. Inflation emerged as a theme, but at that stage it was seen as a sign of growth and not yet a threat to it.
In Phase 3, which began at the turn of the year, the Federal Reserve went from being inflation-relaxed to being inflation-afraid. The stock market crashed on hopes of higher interest rates. All sectors except energy have collapsed. The hardest hit were Tier 1 winners: Technology, Consumer Discretion and Telecommunications Services. Investor time horizons have shortened. Stocks of companies with projected future earnings power, especially technology, are falling. Atom is now back in the favour.
three long years
Over the three years, the best performing industries are energy and industrials. that: archetypes of the ‘value’ style of investing and its antithesis ‘growth’, respectively. The order of their performances has become a mirror image. Energy, especially oil companies like his ExxonMobil and Chevron, had a terrible year in 2020, followed by two breakthrough years. Oil has regained more than it lost.
The tech company has gone through two years of bankruptcy by the 2022 count. Within the big tech category of very large companies, there are significant gaps in performance. Shares in Facebook owner Meta have lost almost half of their value despite a surge in Apple shares (see Figure 2). The chip designer’s stock in Nvidia is up 177% of his, while stock in long-time chip pioneer Intel is down.
Which of the trends of the last three years will be sustained and which will be more temporary? Technology faces structural problems. Companies that grew rapidly in the 2010s, such as Amazon and Netflix, are now maturing their businesses. Tech giants are competing more fiercely with each other. Now that they are so big, they cannot avoid pain if demand in their particular market drops.
The original attraction was that technology companies were less capitalized. Once the digital platform is in place, adding customers does not increase costs like a traditional company would. “Amazon we Retail sales are growing much faster and using much less capital than it took Walmart to reach 5% we It’s retail sales,” says Robert Backlund of bank Citigroup. But it became clear that big technology relied not only on bits, but also on atoms. Buckland said his Amazon capital budget next year will be more than double his ExxonMobil’s. Meta has already made a small investment in establishing a virtual reality platform, but investors are skeptical about it. Netflix’s margins are being squeezed by increased spending on content.
Therefore, the ability to raise capital and use it efficiently could be a key performance differentiator in the new era of rising interest rates. Oil companies were once famous for profiting from exploration. But shareholder pressure to improve returns on invested capital and the stigma associated with new investments in fossil fuels have raised the bar for deploying capital. These days, it’s Big Tech that blows your capex cash flow. Whether mature tech companies can find more discipline will determine whether they can perform better.
More broadly, higher funding costs will empower established businesses across the economy. If capital is plentiful, almost any venture can raise money. Tesla boss Elon Musk has used an era of abundant capital and investor patience to build an electric car powerhouse that poses a deadly threat to General Motors and Ford. With capital so much scarcer now, Tesla aspirants don’t get that kind of generous backing, tipping the scales toward companies that can generate cash from their legacy investments. may feel less threatened by
The end of all this is technology, never lame, but not as fast as it used to be. Meanwhile, the old economic tortoise has emerged from its shell to have an amazing spring under its feet, yet the strangest business in living memory his cycle isn’t over yet. Expect more surprises. ■
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https://www.economist.com/business/2022/11/27/the-new-winners-and-losers-in-business New winners and losers in business