fortune--2020-11-19--China search giant Baidu inked a $3.6 billion deal for a live-streaming platform. Then came the frau

China search giant Baidu inked a $3.6 billion deal for a live-streaming platform. Then came the fraud claims

On Tuesday, Chinese search engine giant Baidu announced it was acquiring a live-streaming service called YY Live from Guangzhou, China-based social media firm JOYY in a $3.6 billion all-cash deal. The purchase would be a chance for Baidu to expand into live-streaming, an enormously popular social media and retail channel in China.
But less than two days later, a report by short seller Muddy Waters Research accused YY Live of extensive fraud.
In a report published Wednesday, San Francisco-based Muddy Waters said YY Live is “almost entirely fake.” Muddy Waters said in a statement that it had been investigating YY Live for a year and was unprepared “for the surreality of Baidu announcing its intention to buy YY Live from JOYY” just as Muddy Waters was preparing to release its findings that “YY Live is about 90% fraudulent.”
China’s live-streaming industry is booming. It’s currently worth roughly $66 billion, but analysts say the pandemic is accelerating growth so much that the market could double by the end of the year. On live-streaming platforms, influencers and celebrities broadcast real-time videos of themselves doing various activities—talking to fans, conducting makeup tutorials, even farming—and viewers can send them cash gifts or purchase products featured in the videos directly from the streams.
JOYY, which debuted on the Nasdaq in 2012, was a standout in the live-streaming market, with a market capitalization of $8 billion before the Muddy Waters report. When it released its third-quarter financial results on Monday, JOYY reported a 36% year-on-year increase in revenue, 390 million global average monthly active users (MAUs) across all platforms, and 92 million average MAUs on its live-streaming services.
But the Muddy Waters report on JOYY alleges that a majority of fans on YY Live are actually bots; live-streaming performers on YY Live receive “only a fraction” of their reported earnings, and much of the activity on the site consists of “continuous sham transactions.” It described YY Live as “an ecosystem of mirages.”
Muddy Water claimed JOYY’s other businesses—its international live-streaming arm called Bigo and its online dating service—are fraudulent too. JOYY’s shares dropped 26% on Wednesday in New York.
Baidu and JOYY didn’t immediately respond to Fortune‘s requests for comment. JOYY told Bloomberg that the Muddy Waters report was “full of ignorance about the live-streaming industry” and contained “a large number of errors with unclear logic, confusing data, and hasty generalizations.”
Muddy Waters, for its part, has an established track record of accurately alleging fraud, including identifying misconduct by U.S.-listed Chinese firms.
Muddy Waters published a report citing fraud at China’s Luckin Coffee chain on Jan. 31. Nasdaq delisted Luckin in July after Luckin revealed in April that an internal investigation had uncovered substantial sales fraud.
Muddy Waters alleged in May that GSX Techedu, a New York Stock Exchange-listed Chinese education company, had a majority of fake users. The U.S. Securities and Exchange Commission subsequently launched an ongoing probe into the firm, which several other short sellers had also flagged for fraud. GSX said it was conducting its own review of the allegations that is also ongoing.
The fraud allegations against JOYY come as the U.S. tightens regulation requirements for Chinese firms hoping to list on U.S. exchanges, a shift jumpstarted by the Luckin fraud scandal. The SEC is going forward with a plan to delist companies that don’t comply with certain U.S. audit requirements, which disproportionately applies to U.S.-listed Chinese firms.


fortune--2020-11-19--Facebook and Twitter could face Russian ban again—this time for calling out Russia’s state-affiliate

Facebook and Twitter could face Russian ban again—this time for calling out Russia’s state-affiliated media

One of the world ’ s strictest new lockdowns bans outdoor exercising and dog-walking

Russian lawmakers are fed up with American social media platforms labeling Russian state-affiliated outlets as Russian state-affiliated outlets.
In recent years, Facebook and Twitter enraged outlets such as Sputnik and RT by removing some of their pages for “inauthentic behavior” and cutting their advertising after U.S. intelligence said they had tried to interfere with the 2016 election. The platforms have also recently started alerting users to the fact that the outlets’ and their staffers’ accounts are linked to the Russian state.
Both RT and Sputnik grumbled that they and some Chinese outlets were being treated unfairly. They noted that the same labels were not being applied to Western public broadcasters such as the U.K.’s BBC and the U.S.’s NPR.
On Thursday, lawmakers from Vladimir Putin’s United Russia Party took up their cudgel on behalf of their state-affiliated media, proposing draft legislation that would allow the blockage of the U.S. social media platforms for discriminating against Russian outlets.
“The urgency in adopting the draft law is due to numerous cases of unjustified restriction of Russian citizens’ access to information in the Russian media by certain internet resources, including those registered outside Russia,” an accompanying note read, according to Reuters.
Online control
It’s difficult to tell whether the blockage threat, to be carried out by Russian communications regulator Roskomnadzor, is an idle one.
Microsoft’s LinkedIn has been banned in Russia for several years because the company refused to store the personal data of its Russian users on Russian soil.
However, while the Russian authorities have for years been unsuccessfully trying to get Facebook and Twitter to comply with the same law, the threat of public outrage at such a move has restricted them to merely issuing fines—each company had to pay a less-than-whopping $63,000 earlier this year.
Neither Facebook nor Twitter had, at the time of writing, responded to a request for comment on the latest legislative proposal.
Putin’s government has imposed a wide range of restrictive measures on Internet use in Russia, including prosecutions for sharing memes that mock religious figures, running an ever-expanding list of banned websites and services, and banning the use of virtual private networks (VPNs) that can be used to circumvent those blocks.
However, this censorship system was weakened several months ago, thanks to a series of rulings from the European Court of Human Rights—which said Russia’s site-blocking measures were excessive and in violation of free expression—and from Roskomnadzor’s embarrassing climbdown regarding the blockage of Telegram, an encrypted messaging service that refused to hand the authorities its encryption keys and that successfully survived the regulator’s flailing efforts to stop Russians from accessing it.


fortune--2020-11-19--The Boeing 737 Max faces an even tougher hurdle now: passenger fear

Fatal flaws in the Boeing Co. 737 Max have been addressed and the plane is now safe to fly, U.S. aviation regulators contend. Yet for many airline travelers, a central question remains: Do I feel safe flying in a plane that crashed twice, killing 346 people?
“There’s no way I’m flying it, period,” said Jon Bonne, a New York-based food and wine writer. “No one in commercial aviation scraps a bad airplane and just starts over. So we’re stuck with the Max.”
The Max’s catastrophic failures were attributed to Boeing’s shortcomings and U.S. regulators’ deference to the industry they govern. “That’s what caused the Max to get off the factory line with a whole lot of problems,” said Jerry Elams, a sales executive in Austin, Texas, who plans to “wait a couple of years” before flying on a Max, even if it means adding a connection to one of his trips.
“I’m a business person,” he said. “If I kill my customers, they don’t come back. It’s the oddest thing.”
Others noted that the Max is now among the most analyzed aircraft in history, given the aftermath of the late 2018 crash off Indonesia and the second disaster a few months later in Ethiopia. Having grounded the plane in March 2019, the Federal Aviation Administration lifted its order on Wednesday.
“I guess I just trust enough in the airline industry given their overall record,” said Kristen O’Brien, a writer in Austin, Texas. “The Max has been so scrutinized now that I feel like, if anything, it’s got to be safer than other planes.”
The coming months
The four U.S. airlines that have bought the 737 Max are preparing to return it to service in coming months, with American Airlines Group Inc. leading the way in late December on flights between its Miami hub and New York’s LaGuardia Airport.
United Airlines Holdings Inc. said each one of its Max airplanes will require about 1,000 hours of work and training before resuming service in the first quarter of 2021. Alaska Airlines will take the first of its 32 aircraft in January and begin customer flights in March. Southwest Airlines Co., the largest Max customer, plans to resume flying the plane in the second quarter.
“If we had a cause for doubt of the safety of our fleet—or any subset of it—simply put, the planes would not fly,” Southwest Chief Executive Officer Gary Kelly said Wednesday in a customer letter.
People keep asking "would you fly the #737MAX" and my answer is simple: At some point I won't have a choice if I want to get somewhere, and that'll be that.
Though I will say that the resumption of flights next month should not be celebrated or turned into an event. People died. — Jason Rabinowitz (@AirlineFlyer) November 18, 2020
American said that if its passengers don’t want to fly on a 737 Max, they won’t have to. “If a customer prefers to not fly on this aircraft, we’ll provide flexibility to ensure they can be easily re-accommodated,” the carrier said in a message to employees.
While the coronavirus has decimated the aviation industry, it may also serve to drown out media scrutiny of the Max’s return, said Spud Hilton, a former travel editor at the San Francisco Chronicle. He said he’ll fly on the Max without trepidation, and noted that most airline travelers don’t pay attention to which aircraft type they’re on anyway.
“Because of the pandemic, I think people are a lot more worried to get on any plane than on any specific plane,” Hilton said. “I don’t mean to say that the 737 Max has benefited from the pandemic, but the pandemic has certainly taken a lot of attention away from its history.”
John DiScala of Los Angeles, who runs JohnnyJet.com, a travel news and credit card referral website, said he won’t hesitate to fly on a Max, because of the global regulatory scrutiny it’s received—and as a result, Boeing’s effort to fix it.
“But it’s not my plane of choice,” he added, pointing not to its crashes, but to its often tight cabin configurations.
A second chance?
But others are unwilling to give Boeing a second chance.
“I do not like this track record,” said Alison Hansen, a corporate learning executive in Dallas. “Given options, what would be the reason to choose that plane? There’s no reason.”
Boeing’s Max development was plagued by missteps, including faulty assumptions about pilots’ reactions and U.S. regulators who were ill-prepared to assess Boeing’s design changes, according to an international safety review released in October 2019.
In a statement Wednesday, Boeing Chief Executive Officer David Calhoun said the Max crashes “have reshaped our company and further focused our attention on our core values.”
The Max has likely emerged from its 20-month grounding as a safer model than most because of probes by multiple regulators, said Jamie Perry, a marketing executive in New York and a former airline executive. “I would have had qualms about flying it after the two crashes—but before it was grounded,” he wrote in a note Wednesday. “Then it felt high risk. I don’t feel that way now.”
An open question for Boeing and the airlines who buy its planes is how long will the Max’s reputation linger in the mind of travelers? It could be a case where customer fears mar the plane for only a short time—unless there’s another major incident.
“That perception will hang around for years, but it won’t necessarily be a deterrent,” Hilton predicted. “It’ll just be ‘Oh yeah, remember when this thing used to fall out of the sky?’”


fortune--2020-11-19--Bitcoin bulls and bears: Tech execs discuss what’s in store for cryptocurrency

Seeing the U.S. already fall behind China in the race to 5G, Brad Garlinghouse is worried another hotly contested technological battle is headed in the same direction: the race to cryptocurrency preeminence.
As the CEO of Ripple—a software company focused on using blockchain technology to solve cross-border payment inefficiencies—Garlinghouse is frustrated with what he believes to be the U.S.’s confused regulatory approach to the cryptocurrency market.
“The U.S., right now, is out of sync with other major economies like Japan and the U.K. and Singapore, where you do have a single, clear regulatory framework that has provided a level playing field,” Garlinghouse says. “China’s been leaving others in the dust in the race around digital currencies and blockchain technologies…The pandemic has accelerated the world’s move away from paper money, and producing the world’s first central bank digital currency, which is something that China is well ahead of where others are, could put China in the driver’s seat to steer the future of payments and currency.”
On this episode of Fortune Brainstorm, a podcast about how technology is changing our lives, Garlinghouse speaks with Fortune’s Michal Lev-Ram and Brian O’Keefe about how the U.S. is lagging behind China in its adoption and regulation of cryptocurrencies and discusses a practical use of crypto technology.
Ripple uses blockchain and crypto digital assets, specifically one called XRP that’s analogous to Bitcoin, to make the usually lengthy and expensive process of conducting cross-border transactions involving different currencies much cheaper and simpler. But whereas the U.S. government has declared Bitcoin and Ethereum—two cryptocurrencies that China has controlled with regards to mining, according to Garlinghouse—to be decentralized and therefore exempt from securities laws, it has not yet given the same stamp of approval to XRP. Such a decision may cause Ripple to leave the U.S., Garlinghouse says.
“On the topic of moving, believe me, we certainly wish this wasn’t something that we were thinking about,” Garlinghouse says. “But if we don’t have clarity, I have an obligation to our shareholders. Without that clarity, it’s limiting our success. And so all we’re asking for is a level playing field, and if we need to move to another country to get that, then that’s the path we’ll have to take.”
Meltem Demirors, chief strategy officer at CoinShares, joins the podcast to share why she is still bullish on Bitcoin. While the flag-bearing cryptocurrency has been cyclical and volatile in the past, reaching extreme highs and lows over the course of the past decade, Bitcoin has shown strong secular growth, according to Demirors, as its average share price has steadily grown over the long term. Positive secular trends, the normalization of Bitcoin as an alternative asset, and the uncertain future of the traditional 60/40 portfolio have all caused Demirors to push back on the idea that Bitcoin’s bubble is about to burst.
“The word ‘bubble’ gets thrown around very casually in a lot of conversations about a lot of different assets,” Demirors says. “There are going to be cycles. In Bitcoin, the cycles are maybe a bit more volatile—a bit like riding a roller coaster. But the secular trend, certainly in my view, mimics and will continue to mimic the growth we’ve seen in dotcom stocks and other emerging sectors that are popping up all over.”
Earlier in the episode, Lev-Ram and O’Keefe bring on Fortune tech reporter Robert Hackett to discuss his more pessimistic view of Bitcoin’s future. Believing its rocketing stock price to “have all the hallmarks of each last bubble that we saw with Bitcoin,” Hackett advises investors to exercise caution, characterizing Bitcoin as a true gamble.


fortune--2020-11-19--The challenge of virtual board meetings

The challenge of virtual board meetings

This is the web version of CEO Daily. To get it delivered to your inbox, sign up here.
Good morning.
Are virtual board meetings as effective as in-person board meetings? A full 45% of those responding to a NACD survey being released this morning say, “no.” Only 15% say, “yes.” The remainder sit on the fence.
The challenge? According to 72% of those responding, it’s the loss of “nonverbal communication between directors.” Eye rolls, strategic slumps, purposeful notetaking, and other well-worn tools of board room persuasion apparently lose their power over Zoom. Still, 93% of the respondents said their board was “able to govern effectively in the new environment,” while 63% said their time commitment as a director went up.
“Clearly virtual meetings are not the same as in-person meetings, and many surveyed report missing the unique value of these in-person meetings,” said NACD CEO Peter Gleason. “However, because directors report being able to effectively govern in these conditions, I would expect many boards to experiment with virtual meetings to see how they are best used, and to ultimately find some balance between the two in the years ahead.”
While 26% of the directors reported attending an in-person board meeting in this year, and another 36% expect to attend one in the first quarter next year, the remaining 38% say they don’t expect an in-person meeting until after the end of March 2021. You can read the full report here.
Separately, in reporting on Fortune’s CEO Roundtables yesterday, I missed the session on subscription businesses. Zuora CEO Tien Tzuo offered this bit of wisdom on building a successful subscription business: Never sit still. “The most important thing is to get something out there, and then go through this process of experiment and learning.”
More news below.
Alan Murray
@alansmurray
alan.murray@fortune.com
TOP NEWS
737 Max
Boeing's share price jumped over 5% on the news that the U.S. Federal Aviation Administration has cleared its 737 Max for takeoff again. The planes have been grounded for record 20 months, following two fatal crashes. However, a criminal probe by the U.S. Justice Department is still ongoing, as is an SEC probe. Also, the market for new planes is… not great right now. As such, Boeing shares fell in late trading, closing down 3.2% yesterday. Fortune
2°C max
Despair thee not! Climate pledges by major polluters such as China, along with President-elect Joe Biden's planned re-entry of the U.S. into the Paris climate accord, means the world stands a chance of keeping global warming to less than 2°C, and, ideally, to 1.5°C or below. That's according to Patricia Espinosa, head of the United Nations climate office. "Science has told us that we still have a chance to achieve it. Looking at these announcements, I think that we should be also having even more hope," she said. But also: "I don’t want to sound like it’s a done deal." Associated Press
Apple fees
Apple is halving the cut—from 30% to 15%—it takes for most apps sold through its App Store. That is, the apps from smaller developers; the likes of Netflix and Spotify can't jump for joy here. Apple's hit will be somewhere between $600 million and $1.6 billion next year, depending which analyst you listen to. The move comes against a backdrop of antitrust probes and developer lawsuits; and many developers (hi, Spotify) remain deeply unconvinced. Fortune
Apple throttling
Apple will pay $133 million to settle states'' allegations over its slowing-down of iPhones to prompt device upgrades and mask battery problems. The offending actions took place in 2016; states see it as deception and said Apple should have disclosed the issues or replaced batteries. This settlement is separate from the one Apple struck in March to stem a class action by iPhone owners. Fortune
AROUND THE WATER COOLER
Joyy deride
Short-seller Muddy Waters sent Joyy's shares tumbling by accusing the Chinese firm of being a "fraud tech company." Muddy Waters founder Carson Block said Joyy's YY Live livestreaming service, which Baidu just agreed to buy for $3.6 billion, was "guilty of bot forming, creating fake transactions and having fake users." The accusations of revenue inflation and dodgy payments knocked Joyy's share price by more than 18%. Baidu's share price also dipped. Bloomberg
Mayer's back
Former Yahoo chief Marissa Mayer's startup, Sunshine, has released its first app. It's an invite-only address book app called Sunshine Contacts, which aims to cull double entries using A.I., and update old contact details by drawing on information from sources such as LinkedIn and email. Fortune
TSMC in Phoenix
Chipmaking giant Taiwan Semiconductor Manufacturing Co. (the one that's making Apple's buzzy new M1 processor) has won approval from city officials in Phoenix, Arizona, to build a $12 billion factory there. Phoenix Mayor Kate Gallego said the deal was "a great success across so many levels of government in helping Arizona become a leader in advanced manufacturing." Construction should begin next year, and production in 2024. Reuters
Email diet
If you're tempted to send an email today that simply says "Thanks" or "LOL", maybe hold off. British officials working on environmental policy are reported interested in research that says over 64 million unnecessary emails are sent by Britons every day, and cutting down would also cut emissions. "We’ve been looking at research suggesting that if you reduced those emails by just one a day, you would save a lot of carbon," said one. Financial Times
This edition of CEO Daily was edited by David Meyer.


fortune--2020-11-19--Oxford says COVID-19 vaccine has produced strong immune response ahead of late-stage trial results

The University of Oxford confirmed that the Covid-19 vaccine it’s developing with AstraZeneca Plc produced strong immune responses in older adults in an early study, with key findings from the last phase of tests expected in the coming weeks.
The results, published Thursday in The Lancet medical journal, shed more light on preliminary data released in recent months showing the experimental shot generated an immune response in the elderly, who are at highest risk of severe illness.
“This is a very important step, because the big worry with any vaccine is that it doesn’t work so well in older people,” Richard Horton, The Lancet’s editor-in-chief, said in an interview with Bloomberg Television. The data is “another brick in the house that we’re trying to build for this vaccine.”
Researchers still await late-stage trial results that will show whether the jab can meet the high bar set by front-runners Pfizer Inc. and Moderna Inc. AstraZeneca shares rose as much as 1.7% early Thursday in London.
The past two weeks have brought a flurry of promising vaccine news. Pfizer, working with Germany’s BioNTech SE, said Wednesday that its shot was 95% effective in a final analysis of trial data, paving the way for the company to apply for U.S. regulatory clearance. Moderna’s vaccine appears equally effective.
The results of Oxford’s phase 2 study show that the vaccine is better tolerated in older people and produces a similar immune response in old and young adults.
The study involved 560 adults, including 240 over the age of 70. Older patients have been hardest hit by the pandemic, with the vast majority of deaths occurring in those over 60. Data released in July showed the vaccine generated robust immune responses in adults aged 18 to 55.
“Inducing robust immune responses in older adults has been a long-standing challenge,” Angela Minassian, an investigator at Oxford, wrote in a statement. “To show this vaccine technology is able to induce these responses — in the age group most at risk from severe Covid-19 disease — offers hope that vaccine efficacy will be similar in younger and older adults.”
Oxford expects final-stage efficacy results in the coming weeks.
The study shows the vaccine causes few side effects and provokes a response in T-cells that target the virus within 14 days of the first dose and a protective antibody response within 28 days of the booster dose. Neutralizing levels were achieved by 14 days after a boost vaccination in 208 of 209 patients.
The two-dose regimen required for the leading vaccine candidates mean that about 15 billion doses could be required to inoculate the global population. Distribution and the anti-vaccination movement are now the two biggest challenges facing the vaccine effort, according to The Lancet’s Horton.
“The responsibility of our political leaders is to really build trust with the public,” said Horton. “We have to protect the progress we’ve made and the anti-vaccination movement is a threat to that progress.”
–With assistance from Francine Lacqua.


fortune--2020-11-19--The vaccine rally is on pause, even slowing Bitcoin’s march

This is the web version of the Bull Sheet, Fortune’s no-BS daily newsletter on the markets. Sign up to receive it in your inbox here.
Good morning. With COVID deaths and second wave fears front and center again, the markets are slipping into a familiar pattern: oil and equities are falling, while the dollar climbs. Even Bitcoin is slipping in choppy trade.
Let’s check in on the action.
Markets update
Asia
The major Asia indexes are mixed in afternoon trading with the Shanghai Composite the best of the bunch, up 0.5% .
are mixed in afternoon trading with the Shanghai Composite the best of the bunch, up . The diplomatic tensions between China and Australia continue to deteriorate with PM Scott Morrison saying in a TV interview that Australia’s “values, democracy and sovereignty ‘are not up for trade.'” This comes after China delivered to Australian media a list of grievances against the Morrison government.
Activist short-seller Carson Block has a new Chinese company in his sights: livestreaming giant Joyy Inc. In a report published on Wednesday, Block’s firm, Muddy Waters, called Joyy a “fraud tech company,” sending its shares tumbling 26% in New York trading. Spoiler: I have a feature on Block and his fellow activist shorts coming out in the upcoming issue of Fortune, available to read online or in the mag the first week of December.
Europe
The European bourses were in the red at the open with the Europe Stoxx 600 down 0.8% at the open.
were in the red at the open with the down at the open. Britain is close to a trade deal with Canada , sources tell Bloomberg, that would avert new tariffs come Jan. 1. It’s a potential huge win for Ottawa as the U.K. is the country’s third biggest trade partner .
is close to a trade deal with , sources tell Bloomberg, that would avert new tariffs come Jan. 1. It’s a potential huge win for Ottawa as the U.K. is the country’s . Are the markets tiring of vaccine news? AstraZeneca shares were up a modest 0.8% at the open after its drugmaker partners at the University of Oxford reported that elderly patients are producing a strong immune response in trials of its COVID-19 vaccine.
U.S.
U.S. futures point to a weak open. The Dow, S&P and Nasdaq all collapsed in the final hour of trading on Wednesday after New York City ordered the immediate shut-down of public school buildings to stop the COVID spread.
point to a weak open. The and all collapsed in the final hour of trading on Wednesday after New York City ordered the immediate shut-down of public school buildings to stop the COVID spread. JPMorgan Chase CEO Jamie Dimon came down hard on lawmakers yesterday, accusing them of “childish behavior” for failing to reach an accord on a new coronavirus stimulus package . He would like to see some kind of agreement in place to help out struggling Americans early in the new year, if not sooner.
. He would like to see some kind of agreement in place to help out struggling Americans early in the new year, if not sooner. For the first time since 2013, the euro supplanted the dollar as the planet’s top payments currency last month. The greenback is down 11% since March.
as the planet’s top payments currency last month. The greenback is down since March. It’s Thursday. That means it’s jobless claims day. In Italy, that means it’s gnocchi day.
Elsewhere
Gold is down, trading below $1,860/ounce .
is down, trading below . The dollar is up, advancing while equities fall.
is up, advancing while equities fall. Crude is lower with Brent trading around $44/barrel .
is lower with trading around . Bitcoin has fallen 3% in the last 24 hours, and is now trading below $18,000. Despite the tumble, crypto bulls still expect to see $20K Bitcoin by year-end. Here’s why.
***
Buzzworthy
The vaccine rally
Is it already on life support?
Vaccine upside is already priced in, BofA equities analysts say.
The merits of investing for the future
Unlike in past crises, firms have skimped dramatically on R&D and CapEx since the COVID pandemic hit, Goldman Sachs says.
Here’s why that’s a bad idea—the firms that have invested heavily in innovation have outperformed this year. (Source: Goldman).
Tesla bears: not having a good pandemic
***
Postscript
It’s reader mail time.
S.C., hailing from the sunny East Coast of Florida, sent me the following limerick yesterday. It’s so good, I have to share it. Here goes:
When your stock picker shouts out “Impavid!”
Believing Stocks are cheap,
“So lets have it.”
Surmising the cromulent
For personal emolument,
At expanding portfolios, they’re avid!
Bravissima, S.C.!
Note: Are the bull markets inspiring your creative side? If you’ve got market-themed haikus, limericks, knock-knock jokes, song lyrics, one-act plays, whatever—send them my way!
***
Have a nice day, everyone. I’ll see you here tomorrow. In the meantime, stay impavid!… And remember: there’s more room below.
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.
Today's read
Robinhood to the IPO rescue? The popular trading platform is eyeing a potential IPO in Q1 2021, according to Bloomberg, and it's already begun courting investment banks. Not that Robinhood is short of cash. The company recently raised $460 million in a series G funding round, pushing its valuation to $11.7 billion.
Some of these stories require a subscription to access. There is a discount offer for our loyal readers if you use this link to sign up. Thank you for supporting our journalism.
Market candy
0.5%
The S&P 500 is up a mere half-percent since Joe Biden was declared winner of the presidential election. BlackRock CEO Larry Fink, for one, thinks the change at the top will be good for the markets. “The marketplace is encouraged by having a leader now that is more inclusive, a leader that could probably bring a little more global harmony,” Fink told the Bloomberg New Economy Forum event this morning in Hong Kong. With more than $7.8 trillion assets under management, BlackRock is the world’s largest asset manager.


fortune--2020-11-19--New Trump administration rule directs insurers to reveal what they pay for prescriptions

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Health insurance companies will have to give their customers estimated out-of-pocket costs for prescription drugs and disclose to the public the negotiated prices they pay for drugs, under an unexpected new Trump administration rule.
The administration said those requirements, part of a broader rule issued Oct. 29 forcing health plans to disclose costs and payments for most health care services, will promote competition and empower consumers to make better medical decisions.
The new rule does not, however, apply to Medicare or Medicaid.
The drug price provisions, which would not begin until 2022, were a surprise because they were not included in the original proposed rule issued in 2019.
It’s the departing Trump administration’s most ambitious effort to illuminate the complex, secret, and lucrative system of prescription drug pricing, in which health plans, drug manufacturers, and pharmacy benefit management firms agree on prices. The administration and Congress have tried and failed to reform part of that system—the rebates paid by drugmakers to the pharmacy benefit managers to get their products onto insurance plan formularies. Those payments, which some call kickbacks, are widely blamed for driving up costs to patients.
Patient advocates and policy experts, while generally supportive of the administration’s transparency concept, are divided on the cost-saving value of the new rule. Many say Congress needs to take broader action to curb drug prices and cap patient costs. Groups representing drugmakers, pharmacy benefit managers and commercial health plans have denounced the initiative, saying it will damage market competition and raise drug prices.
Advocates say the new rule will help patients in private health plans, including employer-based plans, and their physicians choose less expensive medications. It may even enable health plans to buy drugs more cheaply for their members. Three in 10 Americans say they have opted not to use a prescribed drug as directed because of the high cost, according to a KFF survey last year. (KHN is an editorially independent program of KFF.)
Under the new federal rule, starting in 2024 an insurance plan member can request and receive estimates of out-of-pocket costs for prescription drugs, both online and on paper, taking into account the member’s deductible, coinsurance, and copays. Insurers say most plans already offer such cost-estimator tools.
Helping patients find drugs that cost them less could boost their compliance in taking needed medicines, thus improving their health.
“You can call your insurer now and ask what your copay is,” said Wendy Netter Epstein, a health law and policy professor at DePaul University in Chicago. “Patients often don’t do that. Whether or not this has an impact depends on whether patients take the initiative to obtain this information.”
Starting in 2022 under the new rule, private plans also will have to publish the prices they negotiated with drug companies and benefit management companies online in a digital, machine-readable format. That may be particularly helpful to employers that provide health insurance to workers, enabling them to seek the lowest price the drug manufacturer is offering to other purchasers.
The rule will not require plans to disclose rebates and other discounts they negotiate with drugmakers and pharmacy benefit managers.
That’s a disappointment to employers that provide health insurance for their workers. “We’d like a much clearer idea of how much we’re paying for every drug every time it’s dispensed,” said James Gelfand, senior vice president for health policy at the ERISA Industry Committee, which represents large self-insured employers. “We want to know where every cent in rebates and discounts is going. We’ll at least begin peeling back the onion. You have to start somewhere.”
But other experts argue the rule will do little to make medications more affordable. Indeed, they warn that publishing what health plans pay drug manufacturers could crimp some plans’ ability to get price concessions, raising the premiums and drug prices that plan members pay. That’s because manufacturers won’t want to give those discounts knowing other health plans and pharmacy benefit managers will see the published rates and ask for the same deals.
“Insurers and pharmacy benefit managers currently use rebates that are hidden from view to drive prices lower,” said Dr. Aaron Kesselheim, a professor of medicine at Harvard University who studies prescription drug policy. “If you make that transparent, you kind of reduce the main strategy payers have to lower drug prices.”
Patient advocates also questioned how useful the published rates will be for patients, because plans don’t have to post list prices, on which patient cost-sharing amounts are based. There also are practical limits to patients’ ability to price-shop for drugs, considering there may be only one effective drug for a given medical condition, such as many types of cancers.
Still, if the public knows more about how much health plans pay for drugs—and can estimate the size of the rebates and discounts that aren’t being passed on to patients—that could heighten pressure on federal and state elected officials to tackle the thorny issues of high prices and gaps in insurers’ drug coverage, which powerful industry groups oppose.
“If the information is presented to consumers so they realize they are paying a higher price without the benefit of the rebates, you’ll get a lot of angry consumers,” said Niall Brennan, CEO of the Health Care Cost Institute, a nonprofit group that publishes cost data.
The Biden administration is expected to keep the new price disclosure rule for health plans. In July, the Biden campaign issued a joint policy statement with Sen. Bernie Sanders (I-Vt.) favoring increased price transparency in health care.
But Kesselheim and other experts say Congress needs to consider stronger measures than price transparency to address drug affordability. These include letting the federal government negotiate prices with drugmakers, limiting the initial price of new drugs, capping price increases, and establishing an impartial review process for evaluating the clinical value of drugs relative to their cost. Those are policies Biden has said he supports.
“There’s a limit to what transparency can do,” said Shawn Gremminger, health policy director at the Pacific Business Group on Health, which represents large self-insured employers. “That’s why we’re increasingly comfortable with policies that get at the underlying prices of drugs.” As an example, he cited the Trump administration’s proposal to tie what Medicare pays for drugs to lower prices in other countries.
Commercial insurers, drug manufacturers, and pharmacy benefit managers are strongly opposed to the drug transparency rule. “This rule will disrupt the marketplace dynamics and undermine the highly competitive negotiations that kept net prices for brand medicines at a growth rate of just 1.7% in 2019,” said Katie Koziara, a spokesperson for the Pharmaceutical Research and Manufacturers of America. She wouldn’t say whether her group would sue to block the rule.
The survival of the rule, which draws its legal authority from the Affordable Care Act, also depends on the U.S. Supreme Court upholding the constitutionality of that law in a case argued on Nov. 10.
This article is part of a series on the impact of high prescription drug costs on consumers made possible through the 2020 West Health and Families USA Media Fellowship.
KHN (Kaiser Health News) is a nonprofit news service covering health issues. It is an editorially independent program of KFF (Kaiser Family Foundation) that is not affiliated with Kaiser Permanente.


fortune--2020-11-19--Moderna has never distributed a product before. A Swiss company is here to help

Lonza Group AG made its first commercial batch of the main ingredient in Moderna Inc.’s COVID-19 vaccine candidate in the U.S. last week and plans to start European production by the end of the month, Chairman Albert Baehny said.
The company is ramping up and fine-tuning its production lines, a process that may stretch into next year.
“We have access to the raw materials; we have access to the people,” Baehny said in an interview. The main challenge is “to optimize as much as possible.”
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Lonza’s effort is key to ensuring a smooth rollout of Moderna’s vaccine, should the shot prove to be safe as well as effective. In contrast to pharma giant Pfizer Inc., its closest U.S. rival in the race for a Covid shot, the biotech has no other marketed products and has never had to build out distribution channels for a medicine.
Most of the production of the drug substance for Moderna’s vaccine is running via Lonza, a Swiss company with a long history of partnering with big drugmakers. Lonza is building out capacity for 400 million doses a year — 300 million from three production lines in Visp, Switzerland, and 100 million in New Hampshire. Moderna itself has one production line with capacity for 100 million doses a year.
Moderna has said it will be able to deliver 20 million doses of vaccine by the end of this year, enough to inoculate 10 million people. The U.S. will get the first batch.
Moderna’s vaccine is a new type of medicine, like the one from Pfizer and its partner, BioNTech SE. Based on messenger RNA, it essentially transforms the cells of the body into tiny vaccine-making machines. That new technology means that Lonza had to create its production lines “from scratch,” Baehny said. The Swiss company has a 10-year exclusive collaboration deal to produce mRNA products for Moderna.
Baehny declined to comment on whether Moderna and Lonza are in talks about adding more production lines. Lonza would have space, mainly in Switzerland, to accommodate additional manufacturing, he said.


fortune--2020-11-19--What will President Joe Biden mean for investors? BlackRock CEO Larry Fink weighs in

BlackRock Inc. Chief Executive Officer Larry Fink said Joe Biden’s victory in the U.S. presidential election should encourage investors, who want stability and an easing of geopolitical tensions.
“They’re looking for a voice that moderates, not a voice that incites,” Fink said at a Bloomberg New Economy Forum event broadcast Thursday in Hong Kong. “President-elect Biden can be that voice of reason.”
The S&P 500 rose 1.2% in the first trading session after Biden was declared the winner of the election. In his acceptance speech, he pledged to unite and heal a country ravaged by the COVID-19 pandemic and partisan hostility.
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“The marketplace is encouraged by having a leader now that is more inclusive, a leader that could probably bring a little more global harmony,” said Fink, 68.
BlackRock, the world’s largest asset manager, oversees more than $7.8 trillion.
As Biden selects key advisers and sets priorities, Fink said the president-elect should consider spending on infrastructure and broadband for all U.S. homes. Fink, who is sometimes floated as a potential candidate to be U.S. Treasury secretary for Democratic administrations, said he’s “very happy at BlackRock” and that he’s “staying in New York for the time being.”
On the debate for additional fiscal stimulus in the U.S., Fink said concerns over a ballooning deficit can be put to one side, for now, given inflation is low.
“I would say we should worry about it, but it’s not a major issue today,” Fink said. “We need to get growth going. As we get growth, then this deficit, it’ll ultimately be probably north of $30 trillion. These deficits are going to have less impact if we have a broader, larger economy.”
The New Economy Forum is organized by Bloomberg Media Group, a division of Bloomberg LP, the parent company of Bloomberg News.


fortune--2020-11-19--One of the world’s strictest new lockdowns bans outdoor exercising and dog-walking

South Australia began one of the world’s toughest lockdowns Thursday with even outdoor exercise and dog-walking banned as the state tries to contain a cluster of COVID-19 infections.
For six days, only one person from a household will be allowed to leave home each day, and only for essential reasons, authorities said. Schools, universities, cafes and restaurants are closed, weddings and funerals are banned and mask-wearing is mandatory.
“We want to go hard, go early, but get out of it as quickly as we can,” State Premier Steven Marshall said of the measures.
Twenty-three people in the state capital Adelaide have been infected after a cleaner at a hotel used to quarantine people arriving from overseas was exposed to the virus, and health authorities say the “circuit breaker” measures are necessary to avoid a wider outbreak.
Marshall said the strain of the virus that’s circulating is “nasty” as many of those infected are not showing any symptoms. He said it was highly likely to be transmitted from surfaces and that the incubation period was as low as 24 hours.
“It’s a real worry, especially because people who become infected are not showing the typical symptoms that we are used to,” he said.
The state of 1.7 million people, who are spread out over a landmass five times the size of the U.K., had largely eradicated community transmission of the virus after a nationwide lockdown earlier this year.
The cluster, and a more severe outbreak in neighboring Victoria state that triggered a three-month lockdown in the city of Melbourne, show that ongoing vigilance is required to control the virus — even in a nation that has been spared the scale of infections and deaths experienced in Europe and the U.S.
Victoria is proof that hard lockdowns do work. The state, which saw a daily peak of around 700 infections in August, has now gone 20 days without new cases.


fortune--2020-11-19--Starbucks gives baristas a 10% raise

Starbucks gives baristas a 10% raise

Starbucks Corp. announced a round of pay hikes for its baristas — a sign the coffee giant is moving to get ahead of the rising wages in the U.S.
The company will raise wages by at least 10% for baristas, shift supervisors and cafe attendants that were hired on or before Sept. 14. The increase will go into effect on Dec. 14. Starting pay rates will rise 5% “so our store managers can continue to attract and retain new talent,” Starbucks Executive Vice President Rossann Williams said in a memo seen by Bloomberg.
The company will increase the premium it pays above the minimum wage in the markets it operates.
Restaurants are increasingly struggling to keep workers, even after unemployment spiked due to the COVID-19 pandemic. Since service-sector jobs now mean a higher chance of infection, even greater pay isn’t coaxing workers into the kitchen. In addition, wage pressure seems likely to continue rising: Florida recently approved higher minimum pay, while President-elect Joe Biden supported a $15 minimum wage in his campaign.
Early in the pandemic, Starbucks expanded emergency pay for store staff impacted by the coronavirus and extended it through May 31 for those diagnosed or directly exposed to Covid-19. It also provided temporary childcare and distance-learning support, as well as hardship grants for workers in financial difficulty because of the pandemic.
The company has offered sick pay to all store staff since July 2018 and also offers health care coverage to eligible U.S. workers. Non-store workers at the company’s Seattle support center have been instructed to work remotely until October 2021.
CNBC earlier reported Starbucks pay raise.


fortune--2020-11-20--The CDC’s Thanksgiving warning isn’t really about travel

The Centers for Disease Control (CDC) had a new message for Americans on Thursday: Don’t travel during the upcoming holiday season.
It’s an oddly-timed missive given that Thanksgiving is only one week away. Millions have already made their holiday plans, and canceling your air travels and reservations isn’t necessarily the most orderly process.
But given that the average American only lives 18 miles from mom, flying isn’t our biggest problem. Simply driving to your aunt’s house for a Thanksgiving meal isn’t safe, either.
Viruses are going to virus, no matter what your transportation method. And indoor dining is particularly problematic per multiple studies and the CDC itself. Households with close quarters and slipping masks over holiday cheers isn’t going to help the worsening situation, no matter how cozy you may feel in your hometown.
Pandemic communication is a matter of focus. What, specifically, can stop the spread? Which behaviors should we be encouraging based on facts rather than baseless mind mentality and conventional wisdom, especially when it comes to protecting our families, friends, and neighbors?
The thing is that indoor gatherings are significantly more dangerous, as we know so far, than flying on a plane.
Yes, flying in a plane means you’re in an indoor space with other people. Your safety from COVID is going to depend on the individual airlines’ policies and enforcement of public health efforts such as limiting the total number of passengers or requiring masks.
But planes also come with technology like HEPA filters that can help with an airborne disease. Your Thanksgiving table probably doesn’t have the same privilege.
There’s a reason that indoor dining is, once again, flailing in regions like New York City, which are re-considering lockdowns. Take it from the World Health Organization (WHO): A virus spread through the air is most dangerous in enclosed spaces without filtration.
CDC officials on the Thursday call did emphasize, as usual, the importance of personal responsibility: wearing a mask, washing your hands, and socially distancing. But the emphasis on “don’t travel” mere weeks before the holiday season likely won’t mean much when the nature of this virus’ spread is a whole lot more complex.


fortune--2020-11-20--The 21 best stocks to buy for 2021

The 21 best stocks to buy for 2021

Among the many crises that have kept Americans awake at night in 2020, one that looms large is the idea of a “K-shaped recovery” from COVID-19. That’s the premise, backed by a growing body of evidence, that a year of lockdowns, isolation, and uncertainty have widened the wealth gap between America’s work-from-home managerial classes and its paycheck-to-paycheck frontline workers—with the two groups’ well-being moving in opposite directions like the arms of a “K.”
The stock market, meanwhile, has undergone its own K-shaped recovery, albeit one with less dire consequences. Borne up by events that made us more dependent than ever on technology, from e-commerce to teleconferencing, the five Big Tech stocks lumped under the awkward acronym FAAMG—Facebook, Apple, Amazon, Microsoft, and Google—have returned 52.5% year to date, compared with just 6.3% for the other 495 members of the S&P 500. Together, they now have a market cap of $7.2 trillion. If you were keeping your entire portfolio in a typical, “cap-weighted” S&P 500 ETF, 23% of your assets would now be parked in those five stocks alone.
The weeks before Thanksgiving brought promising news on two COVID vaccines, with more likely to come. Though a very difficult winter looms, the odds are good that these lifesavers will help the global economy turn the corner on the pandemic in 2021—and, with luck, trigger a recovery that’s strong enough, and broad enough, to KO both those K-shapes.
Where stocks are concerned, that ray of hope is leading pros to reconsider where they’ll earn the best returns. In the industries most beaten down by the pandemic, the thinking goes, companies’ shares should have more room to snap upward as their earnings recover. “It’s the materials stocks, the consumer discretionary, the financials, industrials that will come roaring out” as the economy normalizes, says Sarah Ketterer, CEO of Causeway Capital. Many managers believe that non-U.S. stocks, which sank faster than U.S. equities as the pandemic settled in, are also poised to surge. Whatever happens, FAAMG won’t be the only game in town, says Saira Malik, head of global equities at Nuveen: “I don’t think we’re going to end 2021 saying, ‘Five growth stocks were all you had to own.’ ”
Betting on these sectors doesn’t mean bailing out of tech stocks. Technology’s central role in driving economic growth is undeniable. That said, analysts expect tech earnings to rise at a slower rate than earnings for the S&P 500 as a whole in 2021. That’s another sign that stocks in other industries could enjoy a prolonged spell in the sunshine as the global economy gets healthier. With that in mind, we sought out stocks in six categories that are poised to deliver big results as the world rebuilds.
Energy and infrastructure
As the U.S. builds new economic backbones, these stocks will benefit.
A new administration typically raises investor hopes of fresh spending on infrastructure—upgrades that both sides of the aisle tend to support. President-elect Joe Biden campaigned on two particularly timely infrastructure themes: a climate plan that calls for $2 trillion in federal investment in “sustainable infrastructure,” and a $20 billion proposal to invest in rural broadband connectivity. Yet even if funding stalls in a gridlocked Congress, there’s reason to bet on companies that build these backbones of the future economy.
Many investors are setting their sights on renewable sources of electricity. While wind and solar account for only about 7% of world electricity generation today, the International Energy Agency expects that figure could rise to 40% by 2040. “We’re just in the very early stages of a multi-decade growth opportunity within renewables,” says Josh Duitz, a senior portfolio manager helping to oversee the Aberdeen Standard Global Infrastructure Income Fund. He’s a fan of utilities known as “yieldcos” for their high dividends, including U.K.-based Atlantica Sustainable Infrastructure (with a 5% dividend) and Clearway Energy (yielding 4.6%), which own and operate solar-panel installations and wind turbines across the U.S. and abroad. Duitz also likes NextEra Energy, the biggest renewable-energy utility in the U.S. NextEra plans to invest $1 billion next year in the emerging frontier of battery storage. That innovation is key to taking renewable energy mainstream, enabling it to be used even after the sun sets or the wind dies down.
The Footprints of Five Giants…
Facebook, Apple, Amazon, Microsoft, and Google (the so-called FAAMG stocks) now account for almost a quarter of the value of the S&P 500.
Mobile data consumption was already growing more than 30% a year in the U.S. before the pandemic; with the reliance on teleconferencing for work and for school, we’re using even more. That means telecom companies will need to continue fleshing out their 5G networks for years to come—in part by putting more antennae on cell towers. “The physics of it is, the more bandwidth you require, the shorter the distance you need to be to a tower,” explains Nick Langley, senior portfolio manager at ClearBridge Investments. That’s good news for real estate investment trusts like Crown Castle and American Tower, which Langley expects will grow earnings at a high single-digit rate for as much as a decade. Duitz recommends Spain’s Cellnex, which is also growing through acquisitions as more European cell phone companies shed their towers to pure-play operators.
Atlantica Sustainable Infrastructure (AY)
Clearway Energy (CWEN)
NextEra Energy (NEE)
Crown Castle (CCI)
American Tower (AMT)
Cellnex (CLNX)
Health care stocks
Waiting for COVID to release its grip on the health care system.
The pandemic is a health care crisis that has been brutal on some health care companies. Elective procedures, a big profit-generator for device makers and hospitals, slowed or stopped altogether, while older people in particular put off medical care of all kinds to avoid exposure to the coronavirus. But while COVID-related challenges remain, encouraging progress on potential vaccines has led some investors to double down on companies that will benefit from a return to normal.
Eric Schoenstein, a managing director and portfolio manager at Jensen Investment Management, likes Stryker, a top producer of orthopedic implants, joint replacements, and other technology that caters to the needs of an aging population. Stryker has what Schoenstein calls a “first-mover advantage” with its robotics-assisted surgical platform, which is used in hip and knee replacements. Roughly half of Stryker’s business can be categorized as “elective procedures,” but as those procedures continue to come back, analyst estimates project its revenues growing more than 13% in 2021. The stock, meanwhile, trades at valuations slightly below the sector average.
Made Bigger by a Boom Year
As the pandemic increased our dependence on telework, e-commerce, and home entertainment, the FAAMG stocks soared.
The full-fledged return of elective surgeries will also benefit Teleflex, whose products include many used in vascular and urology procedures and the treatment of prostate disease. Lori Keith, who manages the Parnassus Mid Cap Fund, sees long-term demand for Teleflex’s equipment as baby boomers age. The stock isn’t cheap, at nearly 30 times estimated forward earnings, but analysts think Teleflex could grow revenues by 13.5% in 2021.
Giant insurer UnitedHealth Group has navigated the pandemic well; its profits even rose early on owing to the decline in elective procedures, leading it to pay some rebates to customers. But Saira Malik of Nuveen calls the absence of post-election risks the “biggest positive” for the insurer: With the next Congress expected to be evenly and sharply divided, Medicare for All is not to be. Malik expects UnitedHealth to expand its footprint in Medicare Advantage plans “at the fastest rate in five years” and to increase memberships in its Optum business (which includes health savings accounts and payment processing). The stock’s forward P/E, at 22 times estimated earnings, trails the S&P 500 average, and Malik believes UnitedHealth could close that gap “as the company’s business model returns to normal” and its shares climb.
Stryker (SYK)
Teleflex (TFX)
UnitedHealth Group (UNH)
Consumer stocks
There’s life after lockdown for some retailers and for live events.
Retail’s long shift to e-commerce accelerated even faster as the pandemic shuttered stores nationwide. But if the eventual arrival of a vaccine coaxes still more people back into in-person shopping, companies that rely on physical stores could reward investors nicely. That’s particularly true of discount retailers, which have been able to please customers with a “treasure-hunting” experience along with lower prices that are welcome in a shaky economy. Parnassus’s Keith is a fan of Burlington Stores, the third-largest off-price retailer in the country after Ross Stores and TJX. Burlington was hit less hard than some brick-and-mortar retailers because many of its stores are in stand-alone locations, not malls, and were able to reopen early. And new CEO Michael O’Sullivan, who came to the company in 2019 from Ross, is making investments in tech for supply-chain management and analytics that should help Burlington continue to improve its operating margins.
An era in which people prefer outside to inside could be a boon for apparel titan VF, whose portfolio includes outdoorsy brands like Vans, The North Face, and Timberland. Investments in e-commerce have paid off with sales increases in recent quarters, Keith says, and the company has shed older brands like Nautica and Reef in recent years to streamline its offerings. Keith also believes VF’s recent $2.1 billion acquisition of youth-favorite streetwear brand Supreme is a potential accelerant for the company’s growth.
Making Up for Lost Time
Analysts expect hefty profit growth almost across the board in 2021, as the economy gets back up to speed.
Katie Koch, cohead of fundamental equity at Goldman Sachs Asset Management, believes that among younger consumers, experiences like concerts and travel matter more than retail therapy—and once a vaccine arrives, businesses that specialize in such experiences could boom because of pent-up demand. That would be music to the ears of Live Nation, the concert and event behemoth that owns the likes of Ticketmaster. Live Nation’s revenues are down nearly 60% in the past 12 months, and with no clarity on when live events might get the all-clear, Wall Street expects earnings to stay depressed in 2021. But Koch says the company has the “balance sheet strength to make it through a continued, protracted shutdown.” For events canceled because of the pandemic, over 80% of Live Nation’s customers opted to hold on to their tickets instead of getting a refund. To Koch, “that’s just a great data point that people are committed.”
Burlington Stores (BURL)
VF Corp. (VFC)
Live Nation (LYV)
Bank stocks
The pandemic chased investors away, but profits have stayed steady for many of the “Big Four.”
No group of companies is a better proxy for the health of the economy than the four giants of financial services: JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup. So far, the market’s comeback has mainly bypassed the Big Four. Since Jan. 1, while the S&P has risen 10%, they have lost an average of 22%. But that has left their stocks so cheap that if their profits rebound, investors could pocket substantial returns.
Several factors are trending in banks’ favor. A strengthening economy should gradually lift rates, boosting “net interest income”—the spread between what banks charge on home and credit card loans and what they pay in interest on deposits. And the Big Four have been posting steady earnings even after taking charges for pandemic-struck loans. Owing in part to a new accounting rule, from January to September, the Big Four booked $62 billion in provisions for bad credit, covering all the COVID-induced losses they’re expecting. The good news: “Unless the U.S. goes into another steep recession, losses should remain at much reduced levels,” says Charles Peabody, chief of boutique research firm Portales Partners.
Underfunded
Bank stocks have lagged the broader market, but bank earnings should jump as the economy moves closer to normalcy.
Bank of America is particularly likely to gain from a rising economy, because it’s focused more on the consumer than on investment banking or trading. In the third quarter, falling rates cut BofA’s net interest income by $2.1 billion, or 17%—but the bank still posted $4.9 billion in profit. It reckons that every one-point rise in the 10-year Treasury yield swells its pretax earnings by $3.34 billion. Peabody thinks BofA’s consumer-heavy mix is super-well positioned for the recovery. “This rebound is more about Main Street than Wall Street,” he says, driven by demand for credit cards and mortgages. And at a P/E of just under 8 on 2019 profits, BofA is cheaper than JPMorgan.
Wells Fargo is a chancier bet. The bank has been suffering from costs associated with a regulatory crackdown over its unethical sales practices, and the Fed has imposed strict limits on its growth. Wells’ shares have fallen 60% from their 2018 peak. But CEO Charles Scharf has had success in chopping expenses. And like BofA, Wells is mostly a consumer franchise—it wrote the most mortgages last year among the Big Four. That fact should help it benefit greatly from rising rates.
Bank of America (BAC)
Wells Fargo (WFC)
Airlines and aerospace
Wary passengers and grounded flights won’t stop these stocks from climbing.
Promising vaccine data in November sent airline stocks soaring off their lows, but investors caution that shares may struggle to ascend much higher anytime soon. Though business travelers vaccinated against COVID-19 may be more comfortable flying, they may still be less inclined to fly to work meetings when they could Zoom instead. And planes aren’t profitable to fly unless they’re full.
Instead, investors hoping to reap returns from a recovery in air travel are looking further up the supply chain, at companies that make and repair airplane components. “There’s lots of ways that airlines can save money, but plane maintenance is not really one of them,” says Bill Callahan, investment strategist at Schroders. As long as planes are taking off, their parts are wearing out—and fixing them is a lot cheaper than buying a brand-new aircraft, which airlines can’t afford at the moment. “Boeing’s pain is their gain,” Callahan says of manufacturers like Cleveland-based TransDigm, which makes aircraft components from the cockpit to the lavatories, and Hexcel, based in Stamford, Conn., which specializes in carbon fiber for planes. While both companies’ shares have surged recently, they’re still far from their pre-pandemic highs; Hexcel trades nearly 40% below its 2019 peak.
Holding Pattern
A partial recovery in U.S. air travel in the summer and fall leveled off as coronavirus cases surged again.
For those who are willing to bet early on airline stocks, consider those with businesses focused on the U.S.: “International travel is going to be impacted for longer than domestic travel,” notes Callahan. Domestic-focused Southwest Airlines has ridden out the crisis more smoothly than the other major U.S. carriers and has taken advantage of pandemic-induced travel slack to add 10 new airports to its routes by mid-2021. Peter Essele, head of portfolio management for Commonwealth Financial Network, believes JetBlue’s reputation for superior customer experience will give it an edge in the long term over more traditional carriers, well beyond the pandemic. Buyer beware, however: Even the strongest airlines will face a lot of turbulence next year.
TransDigm (TDG)
Hexcel (HXL)
Southwest Airlines (LUV)
JetBlue (JBLU)
International stocks
Investors looking abroad are finding strong companies at bargain prices.
During the COVID crisis, American stocks have traded at a premium to international stocks because they were, well, American: Their businesses were supported by stimulus spending from the Fed and by the dollar’s status as the global reserve currency. When the pandemic finally eases, says Goldman’s Koch, “I don’t think the U.S. will have the same hegemony of market outperformance” as investors grow more confident in non-U.S. names. Another confidence-booster for Asian and European stocks: A Biden administration will be more predictable than its predecessor on trade issues.
One stock that Nuveen’s Malik believes will continue its upward trajectory is Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker. The company makes chips that are central to the buildout of 5G worldwide. And semiconductor titan Intel’s recent manufacturing woes are “certainly going to indirectly, if not directly, benefit TSMC,” Malik argues, as Intel may subcontract more of its own chips to TSMC. But the stock still comes at a reasonable price tag, trading at around 23 times forward earnings.
Jensen’s Schoenstein favors Unilever, the multinational beauty and food giant that’s currently consolidating its headquarters in London. Unilever’s brands, which include Dove soap, Lipton tea, Breyers ice cream, and Vaseline, are sold in 190 countries, and its China and North America businesses have been recent bright spots. Like other consumer goods behemoths, Unilever held up well as shoppers filled their pantries during the pandemic. If consumers stay loyal, its stock could have room to run, since it trades at a modest 21 times forward earnings, compared with the U.S. consumer staples average of nearly 26.
Some of those Unilever products may well reach customers via Canadian National Railway, a freight-only railroad whose lines run through the U.S. and Canada and link major ports on the Atlantic, the Pacific, and the Gulf of Mexico. CNR transports a diversified mix of oil, metals, minerals, and forest products, and its consumer goods shipping business saw a particularly sharp recovery as the COVID crisis played out. CNR continued making improvements to its rail network during the pandemic. Schoenstein says that efficiencies from those investments, plus relatively low fuel prices, should position CNR to do even better once other economic locomotives start gaining speed again.
Taiwan Semiconductor Manufacturing Co. (TSM)
Unilever (UL)
Canadian National Railway (CNI)
How Fortune did: When it pays to be cautious
While no one could have predicted the insanity of 2020, Fortune writers Rey Mashayekhi and Anne Sraders did anticipate a year of iffy growth and political tension. The 27 stocks and ETFs they picked in “The Yellow-Light Portfolio” put an emphasis on prudent, resilient companies—and it beat the S&P 500 over the ensuing year, with median returns of 20.6%, including dividends, to the market’s 19.5%. Here are some highlights.
Electrified
Whatever you think of Elon Musk, there’s no denying Tesla had a torrid 2020. The electric-vehicle maker ironed out its production kinks, fought its way to profitability, and earned a spot in the S&P 500. The stock has returned 505% since we picked it, making it by far our best performer. Another winning pick in a related field: Nidec (up 51%), a Japanese maker of EV motors.
Safe shopping
The pandemic has put retailers under tremendous strain but rewarded those that adapted nimbly. Target staffed up to keep its stores open and clean, and stole market share from rivals; it has returned 53% since last year. The work-from-home trend, meanwhile, boosted Home Depot, as homeowners renovated, repaired, and traded up to make the best of their round-the-clock domestic surroundings.
Cash our chips
Our tech picks included Alphabet and Microsoft, which had great years. But our top tech performers were little-known chip specialists. Shares in Synopsys, whose software is used by semiconductor-design wizards, and Dutch chip-component maker ASML returned 63% and 61%, respectively. Each stock soared (along with their industry) as global demand for digital hardware increased.
Can’t win ’em all
Our portfolio included five “bold bet” picks, companies with higher-risk profiles. Tesla and Nidec paid off. British retailer Burberry (down 19%) did not, as luxury brands got crushed by COVID. The fallout from past scandals, meanwhile, clobbered Wells Fargo (down 52%), though our team is betting this year that better times are coming for the battered bank.
A version of this article appears in the December 2020/January 2021 issue of Fortune with the headline, “Stocks for 2021: Invest in the big rebuild.”


fortune--2020-11-20--How to play the 2021 recovery, according to investing experts

Grim news about a resurgent pandemic on one hand, exuberant stock markets on the other. That was the paradox confronting the members of our annual investor roundtable when we gathered to talk about 2021. Fresh hopes about the arrival of a COVID vaccine, of course, were the updraft lifting those soaring stocks. Our panelists shared the optimism, though they had sharply contrasting ideas about how to play a post-coronavirus recovery. (Bet on beaten-up blue chips, or stick with young disrupters? Old-school banks, or fintech?) They shared the concern that stocks could lose their luster quickly if a return to economic normal led to rising interest rates. And they agreed on one other interesting point: Diversity in management and enlightened treatment of employees were good things for shareholders too.
This year’s panel included Savita Subramanian, head of U.S. equity and quantitative strategy and head of global ESG research at Bank of America Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management and author of How I Invest My Money; David Eiswert, head of the top-performing T. Rowe Price Global Stock Fund; Sarah Ketterer, CEO and fundamental portfolio manager of Causeway Capital; and Mallun Yen, founder and general partner of early stage venture capital firm Operator Collective. What follows are edited excerpts from our discussion.
Fortune
Fortune: Investors are absorbing two big pieces of potential good news—U.S. election results that look positive for business, and major progress on COVID vaccines. How might those factors play out in 2021? Should investors be looking at beaten-up “value” sectors like banks and industrials?
David Eiswert: I don’t think it’s quite as simple as value and growth, because the virus has caused this situation of extremes. You can buy growth companies today that have extremely negative business fundamentals. Mastercard is going to be a great stock in the next couple years. But Mastercard lost all its cross-border business to COVID, so the stock has struggled at times this year.
Speaking of borders, U.S. markets performed far better than most foreign markets through the pandemic. Are there international stocks that investors should pivot to?
Josh Brown: What I think will be different 10 years from now is that we’ll stop talking about stocks based on what country they’re in. Investors are going to harness new technology to build globally diversified portfolios, weighted toward sectors where there are strong reasons to be invested.
Same with growth and value. I’ve watched energy go from 18% of the S&P in the mid-aughts to under 1% now. I’m sure it can mean-revert and go back to being 3% or 4%. But it’s not going back to 18%. Our grandkids are not going to be in vehicles powered by dinosaur bones. Value right now is basically energy stocks and banks. And banks are another area where there is no secular growth anymore: Once PayPal got into the room, and Rocket Mortgage and Lemonade and Root and all of these new disrupters? So we are trying to reorient investors’ minds around the concept: It’s not U.S. versus rest of world or value versus growth, it’s stocks that can go up long term versus stocks that only go up in fits and starts.
“An old-school buy-and-hold mentality might be the biggest opportunity to make money.” –Savita Subramanian, Bank of America Merrill Lynch Photographed by Reed Young for Fortune
Savita Subramanian: The idea that we’ll see sectors rather than regions is interesting, but I don’t know if now is the time. For multinationals, what’s happening is they’re forming little ecosystems. And there are big divides between countries today from a values and governance framework. The U.S. and Europe may have a more similar value structure, whereas China’s framework, political backdrop, and governance structure is very dissimilar. Another issue that we need to think about is just the role of China in U.S. companies’ manufacturing.
Eiswert: One of the things that helped U.S. markets get through COVID is that the United States has a global reserve currency and a printing press. So you’ve got great opportunities, still, to buy franchise companies in emerging markets, where the currency got destroyed. There’s a great story of growth in Indian banks. You could have bought HDFC Bank a few months ago for one-and-a-half times book value, which is an amazing valuation for a company that grows its earnings 10% a year.
315% Price premium of growth stocks over value stocks in the MSCI World Index at the end of the third quarter—a gap that suggests value stocks are due to rebound.
There was a major acceleration of technological adoption in so many industries during the pandemic. Will that momentum continue?
Mallun Yen: The digitization of work was always inevitable. What we’ve seen with the pandemic is that what might have taken decades to roll out, it’s forced widespread adoption immediately.
We’re also seeing a new generation of founders who came from, for instance, the Googles and the LinkedIns and the Twitters and the Salesforces of the world, who then go on to these companies that were trying to disrupt those old-school industries—and who now are going beyond that with their own startups. Let me give you an example, which is a company in insurance tech called AgentSync. They do something very boring, which is licensing of insurance agents. But the founders came from LinkedIn, and then went on to Zenefits, in the case of the CEO, and the CTO went to Dropbox and Stripe. They saw a problem with respect to licensing compliance when they were at Zenefits, which is what AgentSync is focused on. And while they are not people who’ve been in insurance all of their lives—they bring with them the LinkedIn experience, as well as Dropbox and Stripe—all that experience from enterprise tech. And so that’s going to enable them to accelerate some of the changes faster than you would see otherwise.
Sarah Ketterer: Before banks get too maligned: From a value perspective, they became so cheap. Valuations of European banks fell through October lower than they were in the global financial crisis, even though they have much more capital now. And if a really good bank has big franchises in faster-growing countries in Central and Eastern Europe, like UniCredit in Italy does, it’s worth looking at. UniCredit trades at 40% of tangible book value, less goodwill, and it should trade at 80%. That, in my simple math, is a double, and I’ll take that any day.
We’ve been talking about the pandemic as a win for tech. But not all technology is COVID-proof. If you’re running, say, an online travel business, your stock is struggling.
Eiswert: We’re shareholders in Trainline. They basically run the app for electronic ticketing for the U.K. and continental Europe. They’ve had a disaster of a year. But they’re only gaining share. And as train ticketing comes back, there’s not going to be any paper tickets. It’s a long-term growth story—they just happen to be on the wrong side of COVID.
Subramanian: The interest rate backdrop is so low right now that it seems like you need to be in really long-duration growth stocks, especially in tech. Those stocks have looked amazingly attractive because the cost of capital has fallen to very low levels. But if you use an interest-rate-sensitive valuation model, growth stocks now look more expensive than value companies.
Eiswert: There’s also a big difference within tech. Apple and Microsoft trade at very high valuations. Amazon, I think, is experiencing extremely positive fundamentals which are not sustainable. And on the other hand, I actually think Google has been hurt by COVID. So Google’s valuation looks attractive. Facebook actually looks attractive.
Ketterer: The stocks in the absolute epicenter of pain of the big wipeout, so many of them are in travel, hospitality, aerospace, and aviation. But wow, what you can find there. Who would have imagined that you could buy Airbus at 12 times earnings—a company in a duopoly. Or in travel, Sabre or Amadeus, its Spanish-listed competitor. They’re all about travel volume, and when it picks up, that’s when they generate fees.
More from the Investor Roundtable
IPOs, SPACs, and direct listings: Silicon Valley opens the doors to more investors
Why investors like socially responsible companies
The biggest risks and opportunities for investors in 2021
Mastercard (MA)
PayPal (PYPL)
Rocket Companies (RKT)
Lemonade (LMND)
Root (ROOT)
HDFC Bank (HDB)
UniCredit (MI: UCG)
Trainline (LON: TRN)
Alphabet (GOOGL)
Facebook (FB)
Airbus (PA: AIR)
Sabre (SABR)
Amadeus (MC: AMS)
A version of this article appears in the December 2020/January 2021 issue of Fortune with the headline “Investor Roundtable: The smart money plots its next move.”


fortune--2020-11-20--IPOs, SPACs, and direct listings: Silicon Valley opens the doors to more investors

When the members of Fortune’s annual Investor Roundtable met this month, late-stage tech startups were very much in the public eye. Sky-high valuations in the private market are encouraging more companies like Airbnb and DoorDash to pull the trigger and go public. And other startups are eyeing alternatives to traditional initial public offerings—including direct listings and mergers with special purpose acquisition companies (aka SPACs).
Those alternatives are often good for the founders—but are they good for investors? Our panelists had no shortage of opinions.
Joining us were Savita Subramanian, head of U.S. equity and quantitative strategy and head of global ESG research at Bank of America Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management and author of How I Invest My Money; David Eiswert, head of the top-performing T. Rowe Price Global Stock Fund; Sarah Ketterer, CEO and fundamental portfolio manager of Causeway Capital; and Mallun Yen, founder and general partner of early stage venture capital firm Operator Collective. The following is an edited excerpt from our conversation.
Fortune
Fortune: DoorDash and Airbnb and other later-stage startups are expected to IPO soon. They have so much more momentum now than we would have imagined eight months ago.
Mallun Yen: At the beginning of the pandemic, everyone thought, Oh, gosh, Airbnb was on its way to going public, and then the travel and hospitality industry was seemingly decimated. Silver Lake was quite prescient, stepping in there at a very reasonable valuation. And now Airbnb is booming.
On the private venture capital side, valuations are kind of crazy. So while a lot of companies are in preparation to file, more and more are looking at alternative ways of getting financing. There’s been a lot of discussion about direct listings and SPACs [special purpose acquisition companies, which raise cash to buy privately held startups and take them public]. That’s not the right alternative for every company, but I love the trend of investor democratization. The openness to doing things not just the traditional way, I think, is ultimately going to benefit the broader economy.
“It’s not U.S. versus rest of world or value versus growth, it’s stocks that can go up long term versus stocks that only go up in fits and starts.” –Josh Brown, Ritholtz Wealth Management Photographed by Reed Young for Fortune
Josh Brown: But it’s not always better. Let’s look at direct listing: Slack went public that way. Not great for shareholders who came in in the aftermarket, and not just because the stock hasn’t performed well. There’s no lockup for insiders. Executives are free to sell, and they’re not under any pressure whatsoever to deliver results. Whereas if you come public in the traditional way, the insiders are locked up for six months, nine months.
With SPACs, I get it: The IPO road show is arduous; you can’t do it in COVID times. This is a really efficient way to match an investor with a company. But that’s the thing: It’s one investor, the SPAC, deciding this is the right price for this company. There is no vetting process. And what we’ve seen with Nikola and others, like MultiPlan, is that oftentimes, these companies would have benefited from having more vetting on a traditional road show. They would never have gotten the valuations they got, and people wouldn’t have lost billions of dollars.
David Eiswert: I can’t even keep track of them. We have 150 analysts, and I still don’t even know what’s going on. You can’t do the kind of due diligence that you want to do.
Of SPACs that have taken a company public, are there any that seem like models for doing it right?
Brown: DraftKings looks good. I like everything about the way they did that. And it was early.
Yen: There are very strong companies that could have done this if they wanted to, but they didn’t—Snowflake, for example. As with everything, there’s a 1.0 model, and the ones that aren’t as strong are going to fall by the wayside.
Sarah Ketterer: I’m going to add that the proliferation of SPACs, plus the record level of loss-making IPOs, tell us something, which is, we’re at a very exuberant part of the market cycle. And what happens after that?
More from the Investor Roundtable
How to play the 2021 recovery, according to investing experts
Why investors like socially responsible companies
The biggest risks and opportunities for investors in 2021
DraftKings (DKNG)
Snowflake (SNOW)
A version of this article appears in the December 2020/January 2021 issue of Fortune with the headline “Investor Roundtable: The smart money plots its next move.”


fortune--2020-11-20--Why investors like socially responsible companies

When the COVID pandemic emerged as a global crisis in February and March, many investors stampeded for the exits and sold off their stocks. But one group kept buying: Investors in funds that specialize in ESG investing, which pick companies based on their records on the environment, social responsibility, and corporate governance.
The panelists on the Fortune Investor Roundtable see that trend not just as a good thing, but as something that could lead to permanent, meaningful changes in how companies operate in the world. At our annual meeting, they talked about hidden “green” companies, the importance of treating employees, and the growing gender diversity in the corner office.
Joining us were Savita Subramanian, head of U.S. equity and quantitative strategy and head of global ESG research at Bank of America Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management and author of How I Invest My Money; David Eiswert, head of the top-performing T. Rowe Price Global Stock Fund; Sarah Ketterer, CEO and fundamental portfolio manager of Causeway Capital; and Mallun Yen, founder and general partner of early stage venture capital firm Operator Collective. The following is an edited excerpt from our conversation.
Fortune
Fortune: The pandemic drew attention to the way companies conducted themselves as corporate citizens. Are investors starting to pay a premium for better behavior?
Savita Subramanian: From February to March, in the fastest bear market we’ve ever had, it was fascinating to see the differentiation of stocks based on some social factors. For example, within sectors, companies with happy employees dramatically outperformed companies with unhappy employees. We also found that companies’ policies around leave were a very important differentiator of returns. We’re all used to thinking about governance risks and financial risks as the big drivers during downturns. But we actually saw these more employee-geared or community-geared factors driving a lot of the returns during that quick but very severe bear market.
Josh Brown: From that severest point through October, sustainable funds and ESG funds took in $30.5 billion in new flows. By the summer, we had taken in more in that category than in all of 2019. And that 2019 number was four times the previous year. A lot of old-school portfolio managers scoff at it. Like, who cares how a company treats its employees? When you talk to investors in their twenties and thirties, they care so much.
Subramanian: And it goes beyond what millennials want. If you’re in an innovative sector that is labor-intensive and your employees are unhappy, they’re going to go to a competitor, and you’re going to lose your advantage.
If you’re in an innovative sector and your employees are unhappy, they’re going to go to a competitor, and you’re going to lose your advantage. Savita Subramanian, Bank of America Merrill Lynch
What’s also interesting with ESG is that there are opportunities to buy “bad” stocks that have material aspects of their business model aligned with ethical considerations. Energy has been essentially purged from portfolios because of its dirtiness. But if you look at some of these electric-vehicle companies, they use batteries—and mining for the metals that go into batteries is a very dirty business. Whereas some energy stocks could do really well from here on ESG measures because they’ve established carbon neutrality goals.
Brown: We’re gonna get a live test of that, Savita, because Exxon Mobil basically said, “We don’t care about ESG at all.” And Royal Dutch Shell said, “By 2050, we won’t have any oil for sale.” So we’ll see how those two companies fare in the next 10 years.
“You have to suffer on the path in the near term, so that you make money over the next two or three years.” –David Eiswert, T. Rowe Price Global Stock Fund Courtesy of T. Rowe Price
David Eiswert: I do think there’s a sense that people are more aware today than they were three years ago about social injustice. And I know at T. Rowe Price, we strive to be a leader here. In an industry that’s been dominated by white men as ours has been, the question is, how much talent are we leaving on the table? We want to do things in the interest of our clients, and that means unlocking talent from diverse areas. That’s an alpha-generating issue, right?
I’d be remiss if I didn’t point out that Mallun’s fund, Operator Collective, operates on that principle.
Mallun Yen: At startups it’s very easy to hire people who are just like you. So we’re trying to get to those companies early to hire outside the dominant homogenous group. We invest in founders from all backgrounds, all genders. But because our investor base is 90% women, 40% people of color, when we invest, we are naturally mentoring, helping, and bringing board members and executives from those backgrounds into that ecosystem.
“Direct listing isn’t right for every company, but I love the trend of investor democratization.” –Mallun Yen, Operator Collective Matthew Sprout—Courtesy Argent
Eiswert: There are just great examples of that this year. Lisa Su at AMD is an amazing leader. She basically is the Intel slayer. It is incredible what she did building that company. Kristin Peck at Zoetis is another great leader. They’re showing by example that they can deliver value.
Sarah Ketterer: Or UPS! [Carol Tomé is CEO.]
Brown: Sonia Syngal at Gap was handed the reins, basically, the day the pandemic started. They were going to spin Old Navy off and have her be the CEO. In March, they said, “Forget it, no spinoff; we’re in trouble. You’re the CEO of Gap now.” And look at the stock chart since then. And I don’t think an elderly white male CEO could do what she now has to do, which is slay Lululemon.
More from the Investor Roundtable
How to play the 2021 recovery, according to investing experts
IPOs, SPACs and direct listings: Silicon Valley opens the doors to more investors
The biggest risks and opportunities for investors in 2021
Royal Dutch Shell (RDS.A)
AMD (AMD)
Zoetis (ZTS)
UPS (UPS)
Gap (GPS)
A version of this article appears in the December 2020/January 2021 issue of Fortune with the headline “Investor Roundtable: The smart money plots its next move.”


fortune--2020-11-20--The biggest risks and opportunities for investors in 2021

When Fortune’s Investor Roundtable met this month, business-friendly election results and positive news about potential COVID vaccines were driving stocks to new record highs. Our panelists are looking forward to helping their clients profit from an economy that might—with a little luck—be rounding back to normal in 2021.
But they aren’t without worries. Tensions between China and the U.S., and between political opponents, state-side, after a divisive election, have several members of the group feeling cautious. Others are concerned about the consequences of getting too much of a good thing: If a strong economy leads to rising interest rates (as it often does), that could hurt stock performance in the long run.
Joining us were Savita Subramanian, head of U.S. equity and quantitative strategy and head of global ESG research at Bank of America Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management and author of How I Invest My Money; David Eiswert, head of the top-performing T. Rowe Price Global Stock Fund; Sarah Ketterer, CEO and fundamental portfolio manager of Causeway Capital; and Mallun Yen, founder and general partner of early stage venture capital firm Operator Collective. The following is an edited excerpt from our conversation.
Fortune
Fortune: Where do you see the greatest opportunities and biggest risks in the year ahead?
Sarah Ketterer: So many companies have been using the pandemic to cut costs and increase operating leverage, and many of them will likely generate higher profit margins than they did pre-pandemic. But the catalyst behind all this is not just vaccines and therapies and testing. We’ve had $10 trillion, globally, of monetary and fiscal support from central banks. This typically hits economies with a one- to two-year lag, so we haven’t even seen the full impact yet. It’s the materials stocks, the consumer discretionary, the financials, industrials, that will come roaring out of this.
The risk that worries us the most is U.S.-China relations. We just opened a Shanghai office, and I want to make sure that there’s free movement of ideas, of knowledge. There’s so much we can learn from private sector companies in China and vice versa. If that’s cut off, and we balkanize, the world is worse for it.
David Eiswert: We now know there’s gonna be multiple vaccines. We’re gonna beat COVID. I feel pretty confident about that on a 12-month, 18-month basis. That’s the destination. But the path is rocky. You have to suffer on the path in the near term, so that you make money over the next two, three years. I think social unrest is a big risk. I don’t understand our country right now. I don’t understand beliefs that people have, and how opposed they are. I think it makes us vulnerable. And I worry about interest rates. Right now we live in zero-interest-rate land. Housing prices are off the hook—what was the 30-year mortgage, recently, 2.8%? When that goes away, all asset prices are going to go down. Do we have an economy that can sustain growth with a 10-year Treasury at 3%? Because that’s going to cause pain.
“We’re at a very exuberant part of the market cycle. And what happens after that?” –Sarah Ketterer, Causeway Capital Photographed by Robyn Twomey—Redux Pictures for Fortune
Mallun Yen: So, 1.1 million workers dropped out of the labor force in September, and 80% of those were women. And the reasons include the fact that a lot of the supports that we have in place for working parents, like traditional childcare and traditional school, went away. How do we make sure that the workforce that we’ve worked so hard to get onto equal footing is not wiped out, so that you can have the Sonia Syngals and Lisa Sus in the next generation?
It’s very hard for working parents, single working moms, to fit into the rigid corporate structure of having to commute in, having to work from eight to five. So I’m very encouraged that people have now gotten used to the fact that, hey, you don’t have to fit into that rigid, traditional corporate construct. We can work a little bit more flexibly.
Savita Subramanian: The S&P 500 in particular, which we all watch as a barometer, has started acting really weird in terms of price swings. We’re seeing eight-standard-deviation events happen every other day—these are supposed to happen every hundred years. And maybe this is because of the democratization of the market, which is good—but it also means you have the ability to express a bet very quickly, and roil the market.
2.8% Average rate on a 30-year fixed mortgage for the week ended Nov. 5–an all-time low. Some investors fear that stock and other asset prices will slump if interest rates eventually rise.
But there’s an opportunity there, too. For the S&P 500, if you’re buying and selling the market on a one-day basis, your chance of making money is a little bit better than a coin flip. But if you extend that time horizon to 10 years, your probability of losing money is less than 5%. So thinking about the market from an old-school buying-and-holding mentality, and not trading as aggressively, might be the biggest opportunity to make money.
Josh Brown: I’ll give you one very big risk. What the Fed did this year was probably essential. But it may have set a really bad precedent. Normally, in a recession of the magnitude that we’ve had, we would have already been in the midst of a wave of corporate bankruptcies. And in fact, there are almost no bankruptcies. And we did that, of course, so that companies would keep their workers and the wheels wouldn’t fall off. But we had a recession without having a recession. And I don’t think that we have fully mentally processed that.
And here’s the problem: We’ll have another recession. It might be in three years, it might be in 12 years, I don’t know. But the pressure on policymakers will be to simply repeat what we just did. And people will say, “Last time you just gave everybody money. Why wouldn’t you do it this time?” “Well, that was a pandemic.” “Oh, well, this time it’s an alien invasion. I feel like that’s just as bad. Pull the trigger.” It’s insanity, but Whirlpool just sold more bathtubs in a recession than in an expansion. Or look at GM’s earnings. It’s bananas. How are we going to avoid doing this again? And here’s the thing: Every time we do it, more debt goes up. We’ve always been in this trap. But now we’re really in it.
Here’s the problem: We’ll have another recession. And the pressure will be on policymakers to simply repeat what we just did. Josh Brown, Ritholtz Wealth Management
Here’s an opportunity that’s profound. Direct indexing [buying diversified portfolios of many individual stocks, rather than index funds or ETFs] is going to change our industry in massive, fundamental ways. We began migrating ETF-only households over to direct indexing. And I cannot tell you the degree of client satisfaction, performance improvement, tax-loss harvesting, the ability to remove companies that aren’t highly ranked on gender equality, to remove gun manufacturers, pull out of oil companies that aren’t trying to improve their environmental impact, etc.
All of the new wealth in the United States is now being generated in Silicon Valley. The new people with high net worth, they look and feel and speak and act and think way differently than the boomer generation. But what they all have in common is they come to wealth managers like me with $10 million net worth, and $8 million of it is in Facebook stock. And I can’t say to that person, “Let’s buy [a Nasdaq ETF],” because all I’m doing is upping their concentration risk in Facebook stock. Ditto for Apple, Salesforce, Google, Microsoft. So direct indexing is allowing us to give them the Nasdaq minus Facebook, or minus web advertising companies.
Every major asset manager is thinking this way, because they know that the ETF is now a 1990s technology in the 2020s world.
Thank you all for giving us so much to think about.
Three things to get excited about, and three to worry about
Get excited about
Non-U.S. stocks
Stocks in emerging markets and Europe are 20% to 30% cheaper than U.S. stocks in relation to their earnings, giving them more upside when the economy improves.
Finance, old or new
Financial stocks look well positioned to soar as COVID-19 eases; ironically, so do the fintech stocks looking to steal their market share.
Younger investors
Their desire to invest in and work for socially responsible companies is changing corporate priorities—and influencing share prices.
Worry about
Interest rates
Central banks have kept rates low during the pandemic. If rates inch back toward normal as the economy improves, prices of stocks and real estate could tumble.
U.S.-China tension
Trade wars and fights over intellectual property could escalate, harming multinationals that depend on global supply chains.
Working parents
School and childcare closures have driven millions of women out of the workforce, with unforeseeable economic consequences.
More from the Investor Roundtable
How to play the 2021 recovery, according to investing experts
IPOs, SPACs and direct listings: Silicon Valley opens the doors to more investors
Why investors like socially responsible companies
A version of this article appears in the December 2020/January 2021 issue of Fortune with the headline “Investor Roundtable: The smart money plots its next move.”