Fourth-quarter earnings continue to come in very strong. As of now, the fourth quarter of 2020 is coming in positive — 2% up from the final quarter of 2019, when analysts had expected an 11% decline. Consensus now expects a 22% rise in S&P 500 earnings in 2021, and a 9% rise in 2022; some analysts are more bullish, with Goldman Sachs projecting 27% and 15% increases, respectively. The fastest-growing earnings are in the materials, information technology, financial, and health care sectors.
As we’ve noted for several weeks, input costs are rising; the producer price index was up 1.3% in January, above expectations. However, earnings reports are beginning to reflect some of the efficiency gains from structural and technological changes implemented in response to the pandemic, including reduced overhead expenses from remote work, and efficiencies gained from business rationalization and the deployment of new tools, including software. Companies are more than offsetting rising costs with improved operating leverage.
Improving operating leverage, abundant free liquidity, recovering and accelerating earnings, the lifting of pandemic lockdowns, and strong fiscal stimulus ahead to benefit consumers and businesses all argue, at least near-term, for a continuation of the pandemic-accelerated themes we have favored for months. These include business digitization, biotechnology, cybersecurity, cloud computing, telepresencing, innovative medical technology, decarbonization of transport, novel materials and recycling technologies and other green themes, and advanced tech hardware — chips, networking, and sensors.
In addition, we see promise in some materials that are essential to the tech buildout inflection, including copper, lithium, rare earths, platinum, and palladium.
We continue to like emerging markets, particularly India. We noted recent news of proposed sale of Indian state-owned enterprises, including an initial list of 13 giants such as Air India, the Life Insurance Company of India, Bharat Petroleum, and two unnamed state-owned banks. Together these sales could total $24 billion, reduce India’s fiscal gap, and stave off consideration of a downgrade of India’s sovereign debt. Promises of shedding state-owned behemoths have faltered in the past; we should not forget how deep is the quagmire of admiration felt by many Indian politicians for its homegrown, stultifying socialism. This time, thanks to Prime Minister Modi’s persistent efforts, may be different; buyers are said already to be showing interest in Air India and Bharat Petroleum. We think it’s a good sign.
Outside the U.S., we continue to like particularly some tech-centered Asian economies, such as South Korea and Japan.
Has gold lost its luster as an inflation hedge, in a world in which other assets which may be superior in that function are increasingly vying for investors’ attention? Certainly, the role of gold as a reliable store of value remains supreme. But as inflation rises, a process which we believe is already beginning, investors may well turn more to gold surrogates — for example, cryptocurrencies, precious metals needed in high-tech applications, and even more standard-issue commodities — because they perceive greater upside in these assets in the context of modern inflation. In periods of severe volatility, gold may still outperform as a safe haven; but in a slow inflationary grind, inflation fighters will want to broaden their universe.
Thanks for listening; we welcome your calls and questions.
Don’t forget to register for Guild’s quarterly conference call on Thursday, February 25, at 10 AM Pacific: “Euphoria Doesn’t Last: How To Maintain Discipline To Maintain Capital.”
