Head of BofA Global Research
Must Reads is back after the July 4th break, but we promise our readers this is just like riding a bike. This week we discuss our latest thoughts on investment strategy, implications from U.S./China tension on European Telcos, and a primer on bicycles.
BofA experienced its largest private client weekly equity inflow in 8 months, but Chief Investment Strategist Michael Hartnett remains tactically bullish despite sentiment moving away from extreme bearishness. Michael defends the market’s high multiples as being rational given that central bank intervention in credit markets justifies lower risk premiums and the strength of equity markets themselves will help lift global economies.
The divergence between value and growth stock performance also demonstrates how markets are being moved by policy rather than fundamentals. The recent spike in gasoline demand shows the economic upside as lockdowns end, but a virus resurgence could reverse this positive trend.
Michael warns that bullish positioning and policy drivers will peak this summer and the continuation of a bull market requires upward earnings revisions to enable the rally to broaden into High Yield credit and value stocks. A vaccine and/or further coordinated monetary and fiscal stimulus could also provide a further catalyst to the bull market.
European telecommunications analyst Frederic Boulan warns that Europe’s 5G plans are embroiled in U.S.-China trade war tensions and European Commission concerns about cyber-security risks. Restrictions on using U.S. technology could impede Huawei’s ability to deliver 5G base stations at required quality standards, potentially driving European Telcos costs higher and slowing 5G roll-outs.
Frederic projects a €5.5bn cost for Telcos to swap out of existing 4G stations and a three-year delay to remove Huawei/ZTE unless mitigated by state support, tax breaks and vendor concessions. Differentiation in exposure changes competitive dynamics in France, Switzerland, Spain, and the UK, but less so among German Telcos.
A shift away from China presents a $5.5bn+ opportunity for European semiconductor companies, but has negative implications for U.S. competitors given Huawei’s 5% of chip consumption.
COVID-19 is driving a surge in solitary leisure activities, specifically bike demand, but consumer analyst Rafe Jadrosich sees further gains supported by behavioral change and improving customer experience.
As more consumers buy bicycles, companies and governments will invest in infrastructure and programs including bike lanes, trails, cycle tours, races, storage, and repair shops, create a virtuous “cycle”. According to aggregated BAC credit and debit card data, spending on bicycles in the U.S. increased 55% YoY in April and doubled in May with momentum continuing into June even as states reopened.
Positive secular trends that support cycling longer term include: 1) health and affordability (prices starting as low as $100); 2) innovation through lighter, more durable materials and adoption of e-bike applications, and 3) eco-friendly commuting and food delivery.
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