The light at the end of the pandemic tunnel is shining brighter by the day. As investors, we know the best time to invest in post COVID opportunities is now – when virus curves are just beginning to flatten and death rates are declining slowly because it won’t be long before these levels come tumbling down. Consumers, businesses and even central bankers are looking to the future, shrugging off weakness in today’s economic reports in anticipation of stronger prospects in April, May and beyond. Governments are racing to get their citizens vaccinated and as progress is being made, more investors will wake up to these opportunities.
Inn the post COVID world people will travel, consumers will spend once again and the companies that innovated during the pandemic will continue to do well. Nearly every one of us have thought about the first things we’ll do when the pandemic ends – from the restaurants we’ll eat in, friends we’ll see to the countries we’ll visit. Here are some of the opportunities that we like specifically:
Indices – Short #QQQ (NQ) / Long #DIA (YM)
Looking for more gains in the S&P 500 this year is one of the most popular Wall Street calls. So many big bank economists are looking for new highs that we can’t help but worry about how crowded this trade has become, but the post COVID-19 recovery will be like no other. Epidemiologists are predicting another roaring 20s. After the trauma of Spanish Flu and World War I Americans came out in droves, partying, dining out and spending. This time, the social and economic prosperity will be global. The only problem is that valuations are sky high and buying US indices is a crowded trade.
Instead a more interesting idea is to go short Nasdaq (#QQQ) and Long Dow (#DIA). Stocks should perform well in the coming months but tech valuations are very overstretched and the race to the top may be coming to an end. This trade works two ways. In a recovery, beaten down companies could thrive once again while work from home tech firms could see their value growth slow. This dynamic shift should lead to the Dow outperforming the Nasdaq. Alternatively, if all of the experts are wrong and stocks come crashing down because of faulty vaccine or new variant issues – or more likely rising inflation and interest rate expectations -the correction in the Nasdaq should be deeper than the Dow, pushing this QQQ/DIA “spread” trade in our favor.
Stocks – Buy #DIS
There are two types of companies that will perform well in 2021 – the ones that rolled new quickly adopted products during the pandemic and those in beaten down industries. One name that qualifies on both fronts is Disney (#DIS). While Disney+ was not launched during the pandemic (it came out in November 2019), it has become one of the biggest winners of the streaming war. From zero to 86 million subscribers in just over a year, this eye popping growth contributed more than $1.9 billion to the company’s revenue in 2020. In 2021, a $1 price increase that begins March and a library of exciting new Marvel, Star Wars and Pixar content means subscriber growth will balloon in the coming years. They will also debut an international service called Star that will include shows from ABC, FX, Freeform, Searchlight, 20th Century Studios and in some countries ESPN. When Disney+ was first launched, the company targeted 90 million customers in year four. Now that they almost achieved this goal in year one, they see as many as 350 million total paid subscribers globally within 4 years.
But that’s not all. Disney theme parks revenue should come back to life in the coming year. The recovery will be slow but Disney enjoys strong brand loyalty and with many families still weary of international travel, the reopening of parks in Los Angeles, Paris and Hong Kong will be met by strong demand. With that said, #DIS stock is expensive – we recommend an initial entry with an eye on averaging down if the price corrects.
Currencies – The Carry Trade Returns
The most popular forex trade in the early 2000s was the carry trade. Everyone from hedge funds to the Japanese house wives was borrowing (selling) in a low yielding currency like the Japanese Yen and then parking those funds in higher yielding currencies. Trillions of dollars were spent on these trades and now those opportunities could return. The best environment for carry trades is a time when investors are optimistic, volatility is low and interest rates are expected to increase. Interest rates hit rock bottom in 2020 and if the recovery takes shape, the talk of reducing stimulus could drive rate hike expectations. Combine that with an equity market rally and everyone will be looking to borrow in low yielding currencies and invest those funds in higher yielding riskier bets. To be more specific, Japan who suffers from decades of low inflation and low growth will be in no rush to raise interest rates. In fact, they will probably be one of the last to tighten. Contrast that with the Bank of Canada for example who sees a future of less accommodation and could be one of the first to raise interest rates, selling the Japanese Yen against the Canadian dollar, or buying #CAD/JPY will be an interesting play. This will be a slow trade but by the end of the year, we could see the pair rising from 81 to 90.
Commodities – Buy Gold (#GLD)
Rising inflation expectations will be unavoidable in 2021. Trillions of dollars were pumped into the financial markets and with demand finally recovering, all big bank economists are calling for higher prices. With interest rates at record lows across the globe, the post COVID recovery could drive prices up quickly. We saw early signs of that in late December. Gold prices will benefit from “reflation,” low interest rates and a weaker dollar. Physical demand is beginning to recover and that trend should continue as US fiscal deficit balloons.
