Every year Byron Wien, from Blackstone’s Private Wealth Solutions group, holds a series of Benchmark Lunches where he invites an assortment of hedge fund managers, private equity and real estate leaders, academics, former government officials and economy and market observers.
These meetings, along with his annual “Top Ten Surprises”, not only provide great insights into current economic and market conditions but also provide perspectives to challenge consensus thinking. Particularly his top ten surprises.
In a sign of the times, this year’s Benchmark lunches where held via Zoom.
I briefly summarise some of the topics discussed below, access to the full discussion can be found here.
Economic Conditions
In general, the tone of the sessions was one of optimism tempered by uncertainty.
Most of the participants thought we would be back to something like the normalcy of 2019 by 2022.
There was divergence of opinion what normal would look like, albeit, to get there, a vaccine will need to be developed, tested, manufactured, and administered.
The economy would take some time to gain its own momentum and there will be some permanent changes.
There were some more specific comments in relation to the economy. It was felt that US unemployment would remain high for some time.
Not surprisingly, many expressed concerns for large portions of the economy which are in serious trouble: hotels, restaurants, resorts, cruise lines and airlines will take a long time to recover.
The strong bounce in manufacturing and housing was encouraging, reflecting very low interest rates.
Vaccine
There was considerable optimism amongst the group for a vaccine, reflecting there are many companies working to develop one. Several of these companies are conducting clinical trials and manufacturing doses in anticipation of regulatory approval. Efforts were being undertaken around the world, Europe, Asia, and the United States.
Many expected an effective vaccine to be available for essential workers by the end of this year, with the general public possibly receiving it by the second half of 2021, and by the middle of 2022 most people who wanted the vaccine could have it.
Nevertheless, there were a wider range of views on the details, such as how long the vaccine would last, whether booster shots would be required annually or more frequently to maintain immunity, and the willingness of people to get the shots.
My take from the commentary, the availability of the vaccine is not the end game, there will be lots of issues to work through once it becomes available.
Working remotely, property sectors, and social impacts
The pros and cons of working from home were discussed, which I think are well understood.
Several real estate investors attend the various sessions. They provided the following key insights:
- Properties that were well financed could wait out the recession.
- Some saw opportunities in the current environment.
- Retail was most at risk, and that some damage to the sector would be permanent. It was highlighted that the US is over-stored and has nearly three times the retail space per capita than the next highest country, Canada.
- There will be increased costs as people return to the office e.g. increased cleaning costs and perhaps the need to upgrade ventilation systems.
Another interesting statistic provided was that according to a June 2020 BLS study, around 40% of American workers have the ability to work remotely, but the other 60% have to be present physically to perform their duties, whether in hospitals, factories, service businesses or transportation.
It will be these people who will spend less on non-essential items.
An important issue to consider is the social impacts of higher unemployment and uncertainty arising from covid-19.
From a societal perspective the impacts are wide ranging, discussions included the impact on young children and their development, along with university graduates looking to enter the work force at a time of economic recession.
Effects of the enormous government and central bank policy response
Most participants expected interest rates and inflation to remain low for the next several years.
There was a level of scepticism toward Modern Monetary Theory and the ability of governments to print money indefinitely.
For the time being, the policy approach remains appropriate, so long as real growth is higher than the rate of inflation.
The recent weakness in the US dollar was noted. There could be several reasons for this, including Europe and Asia have done a better job of controlling the virus and are recovering more favourably.
Likewise, US factors could be playing a role, such as social unrest, poor discipline in limiting the spread of the virus, and gridlock in Washington. In addition, “The prospect of a sweep in November with both the presidency and the Senate moving to the Democrats and a less business-friendly environment in Congress may also have had an influence on the dollar.”
US Elections
Not everyone thought a Biden victory was a sure thing. There are a lot of issues to consider, albeit Biden has a considerable lead and he will be hard to beat.
The group felt the US as a country overall had shifted to the left.
US China relationship
The growing tensions between China and US is seen as an inevitable outgrowth of the long-term shift towards nationalism and away from globalization.
There was concern in relation to China’s policy towards Hong Kong and its military operations in the South China Sea.
On the positive side, Phase One trade negotiations were moving forward and imports from and exports to China continue. A Phase Two deal seems to be off the table for now.
Although bringing production home or relocating will be difficult, costly, and time-consuming, this trend is partially underway.
Energy Sector
A wide-ranging discussion on the energy sector was undertaken.
For a period of time the drop in oil demand this year was four times greater than during the Global Financial Crisis (GFC). The situation has improved, and it was noted China is consuming more oil currently compared to a year ago.
The US has accumulated excess inventory and US production will remain depressed for some time. At the current oil price shale oil production is unprofitable.
The expectation was that the Oil price will not exceed $50 a barrel for West Texas Intermediate until 2022 when the economy gets back to something close to normal. Political conditions in the Middle East will be more unstable until the price of crude recovers.
Happy investing.
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