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Oct 1, 2020

Portfolio Postpandemicus

by Rita Silvan

Rita SilvanBBB Bull Market

Triple-B bonds hover on the edge of the junkyard. Now, thanks to COVID-19, there’s a new triple-B in town: bicycles, breadmakers, and booze. These are in a bull market. Back in April, good luck if you tried to score some yeast at the grocery store. In the U.S., sales of yeast grew (ha) 647 per cent since March 2019. The catalyst for the boom in these goods could be the other B-word: boredom. Or, maybe we’re just at the start of a secular change in lifestyle and spending patterns? If so, these changes are likely to have a big impact on certain industries, as well as on our future investment strategies.

COVID-19 has forced us to become a nation of homebodies, thus giving new meaning to the term “domestic bias”. This drastic shift to home base offers new investment opportunities to those industries which can improve our stay-at-home experiences. Certain market commentators, such as Canadian economist, David Rosenberg, are tracking the fortunes of a basket of companies in cloud computing, home delivery, telecom, and streaming services he has dubbed the “Stay-at-Home Index”. Bottom line: They are doing just fine.

Home Base

You don’t have to look far for evidence that home is where the heart—and office, and gym, and leisure, and school…are.

When we’re not baking bread and swilling booze, many of us are rethinking our home base. Now with restaurants, bars, theatres, concerts, and other group-based entertainments shuttered or hobbled by social distancing and hygiene requirements, living in a 700-square-foot condo in the Big Smoke does not have the same appeal.

Hence, a growing number of people are searching farther afield for more land at more affordable prices. There is hot demand for the holy grail of suburban living: A four-bedroom house with pool. All-season cottages and farmhouses are also on buyers’ radars because long daily work commutes into the city are less likely than before and not the hurdle they used to be. For retired snowbirds, an impetus for moving to the suburbs or the countryside is the uncertainty of travel abroad, especially to the American sunbelt. Affluent snowbirds are eyeing country properties and driving up prices.

More employees are working from home, perhaps permanently. This has already happened at Shopify where most of the workforce will operate remotely henceforth. Expect more teched-up companies to follow suit. It will now be harder for employers to insist all workers put in facetime at the office five days a week. More people will work from home at least part-time.

Pushing people back into the home puts pressure on having sufficient living space to accommodate a designated home office or two, as necessary to productivity as it is to sanity and family harmony.

For those staying in their current homes, upgrades and renovations are in the cards. When you’re spending most of your time at home, you notice things like a shambolic kitchen and an unfinished basement and want to do something about them. A further accelerant for home renovations was the disproportionate number of unnecessary deaths from COVID-19 in seniors’ residences. This will drive up boomers’ interest in renovating their existing homes to facilitate a more dignified and healthier aging in place. It may also spur the building of multi-generational homes, as well as planned micro-communities with turnkey health and lifestyle services.

Secular Shift: I Spy D.I.Y.

Lululemon has seen the light and it is Do-it-Yourself (D.I.Y.). The Vancouver-based company recently purchased Mirror, an at-home fitness platform for U.S.$500 million. The gizmo retails for U.S.$1,495 and you need to buy a monthly membership to stream digital classes. With gyms and studios closed for now and few people in a hurry to sweat it out with the masses, home fitness equipment and services are poised for lift-off.

Just as the Great Depression permanently changed people’s behaviour, COVID-19 has reminded us “Black Swan” events are for reals. And they will happen again. This experience has made us more cautious about spending and more motivated to become self-reliant. Baking bread is just the start. We will become more frugal and D.I.Y. will be the norm for many goods and services we previously outsourced. Think personal grooming such as the perennial favourite, the mani-pedi, as well as exercise, entertainment, dining, and others. Previously fey householders will pick up the cutting shears, nail clippers, hammers and wrenches. A few may even discover they like doing household chores. All hail “Homo Postpandemicus”.

Repatriation is occurring at both the micro and macro levels. Businesses and governments are also reconsidering their supply chains and weighing whether sourcing low-cost goods from China is too high a price in terms of losing self-sufficiency. During the first wave of COVID-19, supply chain disruptions of personal protective equipment and other key medical supplies was a profound wakeup call. This will lead to lasting changes.

As more production is repatriated, businesses and consumers will necessarily have to adapt to higher prices. However, this trend will also lead to more domestic jobs which will offset some of the employment lost due to the economic contraction. Today, Canadian manufacturing represents just 10 per cent of federal Gross Domestic Product (GDP), half what it did 20 years ago. Canada’s beleaguered industrial sector may get a welcome boost.

Ready, Set, Re-Set

“New Frugality” is the name of the game. As we watch storied luxury department stores like Neiman-Marcus and Lord & Taylor and blueblood brands like Brooks Brothers go bust, we see consumers have lost their appetite for pricey designer clothes—at least for the foreseeable future. Instead, the money is going to buying sewing kits and handsaws!

In a recent interview on Wealthtrack, Rosenberg said this secular shift includes buying things we need, not things we want. He’s betting on companies which have what he calls “utility-like” characteristics. Yes, utilities such as pipelines, telecom and the like for yield. But, according to Rosenberg, we should also widen the definition of utilities to include high growth, defensive tech companies, such as Microsoft, Amazon, Google, etc. It goes without saying that biotech, medtech, pharma, and healthcare have a long and very positive runway ahead. Afterall, the solution to our economic crisis is a medical one.

For those inclined to do pair trades, here are some ideas for a “Portfolio Postpandemicus”:

Long: utilities, and utility-like companies, especially tech; home building and supply; home delivery services, medtech/healthcare; consumer staples; gold.

Short: commercial real estate; retail; luxury fashion; travel and leisure; restaurants; gyms; financials.

Whether the recovery will be V-, L-, W-, or U-shaped, one thing is certain, there is an “H” in there somewhere.

 

Rita Silvan, CIM, is the former editor-in-chief of ELLE Canada magazine. She is a freelance financial journalist and the editor-in-chief Golden Girl Finance (www.goldengirlfinance.com), Canada’s leading digital magazine about women and financial matters. She is based in Toronto and can be reached at rita@ritasilvan.com.