August 28, 2020

Transitional Change

 There is a lot going on the capital markets these days that are a clear indication that forward-looking investors see a return to normalcy. I’ve often written about the concept of normalcy in the context that ideas  that have been floating in the minds of politics against the pushback of a crumbling bureaucracy has finally inspired people to take  those ideas into their own hands through investing. In the sectors that include energy  and industrials, investors, especially younger, are embracing renewables and automation respectively leveraged from sectors including Technology and Finance that have seen tremendous savings in the growth of remote working and emphasis on innovations such as 3d printing and machine learning. And as the transitions gain any speed, the move to infrastructure as a long-term project to address a country and planet that are in desperate need for an upgrade, opportunities to invest will abound. In my opinion, transition was always the best strategy to reach solutions, not simply change for the sake of change.


The energy sector is one of the more interesting sectors for two reasons. First is the transitions from fossil fuel producers to renewable producers was accelerated by the pandemic which grounded aircraft and  automobile production. The former destined for some rebound and the latter finally catching the interest of the real potential for electric vehicles. Add to that a strong migration to suburban centers followed by the motivation for alternatives to traditional suburban sources for energy such as solar. And as is customary in the consumer universe, the increased demand for renewable resources is pressuring costs lower. Much remains to be resolved, such as the use of natural gas, increased by a substantial rise in home food preparation but still a contentious piece of the narrative along with nuclear energy production. My only comment to those issues is to highlight that the western economies have accelerated migration to renewables for the last three years not just because it makes common sense but because it’s beginning to make economic sense as well.


Industrials is a sector that has been in disruption for long time. For the last 50 years, as the country moved away from manufacturing domestically to a consumer and service-based economy it was a move that many countries in the west have mirrored. The outcome has resulted as a percentage of GDP of barely 12% in 2019 versus 59% for consumer related sectors. Much of this has been the result of corporations sending production activities to countries with lower labor costs and much as the domestic tax revenue needs have been filled by huge gains in finance related services and technology services, both with global reach. But then we have a pandemic and the resulting massive unemployment has given the wider public a picture of what change for the sake of change can bring. But on the optimistic side the handful of renegotiated Trade deals accepted in rare bipartisan accord has resulted in less costly agreements then the past agreements. Likewise, as developing countries such as India and China that have seen nearly a billion people move into the middle class the need to repatriate many of their own manufacturing and consumer production needs to meet demand and generate domestic revenue and taxes is a new form of nationalism that has caught on, but not without challenges.

Today the pandemic has shown countries they need to pay more attention to the needs of their own populations as areas serving health, food and jobs has increased the repatriation of industries exported  over the decades, and it’s here that I believe there will be genuine employment opportunities. In renewable energy and infrastructure projects that need everything from architects to engineers to project management and construction skills. This fits the transition narrative just as the transition from agrarian to industrial introduced many of our most familiar skills. This is the future I also see the markets reaching for. As I outlined last week, more than two thirds of the S&P 500 companies are still down for the year and that still leaves room for post Covid opportunities and maybe a bit of political volatility as well. Not all bad. 

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