The Transcript 06.29.20

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Succinct Summary: Cases are rising especially in the emerging economies and the IMF is projecting a deeper recession. 

Macro Outlook:

Economies around the world are reopening even as cases increase

“Over 75 percent of countries are now reopening at the same time as the pandemic intensifies in many emerging and developing economies. Several countries have started to recover. However, in the absence of medical solution, the strength of this recovery is highly uncertain, and the impact across sectors and countries highly uneven…” – IMF Economic Counsellor and Research Department Director Gita Gopinath

People seem willing to accept higher infection rates

“Right now we are seeing rising infection rates, but … it’s very apparent to me that the world is accepting higher diseases, higher infection rates … and markets are still pretty stable..I think the market is probably a little ahead of itself at this time, because I still believe we are witnessing real tragedies in the small and medium businesses. What’s remarkable is there are more human beings being affected by the disease today than on March 21 when markets were 40% lower” – BlackRock (BLK) CEO Larry Fink

So economic activity continues to rebound

“On the one hand pent up demand is leading to a surge in spending in some sectors, like retail. On the other hand contact-intensive sectors, like hospitality, tourism, and travel, remain depressed. So countries that are heavily reliant on these sectors are likely to be deeply impacted for a prolonged period”IMF Economic Counsellor and Research Department Director Gita Gopinath

Even travel may rebound faster than people expect

“We also believe that the return to travel can come possibly much more quickly than a lot of people expect. In fact, some of the destinations and hotels in 2021 are already seeing much higher occupancy rates. And as you can imagine, after 3.5 months of most people being stuck at home, they are all eager to travel again. So, we are actually seeing and we have seen already for the last two months that our members are very excited to travel again, and we see that in the demand that has accelerated from April to May and to June. So I think yes, the travel industry could possibly recover much more quickly than people expect right now.”Travelzoo (TZOO) CEO Holger Bartel

Most expect the economy to recover in 2021

“The signals that we are getting from our customers, our partners, the OEMs and the suppliers is that they are pushing back discretionary expenditure they are holding on for cash, but they see the market recovery in 2021 and beyond and they believe in the growth of the industry.” – IHS Markit (INFO) EVP Transportation EVP Edouard Tavernier

But there are still 20m unemployed and many won’t go back to work

“There is still 20 million people filing for unemployment benefits on a weekly basis. And there’s still a lot of people who are not going back to work. So there’s going to be some companies, you’re going to have to downscale or right-size their businesses, and I don’t have enough as to how to balance the two.” – Palo Alto Networks (PANW) CEO Nikesh Arora

A vaccine would be a game-changer

“I’m much more optimistic about the progress with therapeutics and vaccines. Until then, we’re going to be an 80% economy, an economy shifting toward an e-economy.” – Bain Capital Co-chair Stephen Pagliuca

“…better news on vaccines and treatments and further policy support could trigger a faster recovery” – IMF Economic Counsellor and Research Department Director Gita Gopinath

“…medical solutions such as therapies and vaccines will undoubtedly accelerate the pace of the recovery.”Park Hotels & Resorts (PK)  CEO Thomas J. Baltimore

International:

The IMF is projecting a deeper recession than forecast before

“Compared to our April World Economic Outlook, we are now projecting a deeper recession in 2020 and a slower recovery in 2021. Global output is projected to decline by minus 4.9 percent in 2020, which is 1.9 percentage points below our April forecast. Followed by a partial recovery with growth projected at 5.4 percent in 2021…Now these projections imply a cumulative loss to the global economy over two years of over $12 trillion from this crisis. The downgrade from April reflects worse than anticipated outcomes in the first half of this year and expectation of more persistent social distancing into the second half of this year, and damage to supply potential.”IMF Economic Counsellor and Research Department Director Gita Gopinath

It’s been an unprecedented crisis

“This is an unprecedented crisis, and this is indeed the worst recession since the Great Depression…no country has been spared. Both emerging markets, developing economies, advanced economies, have all been very badly hit during this crisis.” – IMF Economic Counsellor and Research Department DirectorGita Gopinath

Global growth is likely to be negative

“Our industry analysts across every sector have taken down their views of growth in Q2 and for the balance of the year. Six months ago at the beginning of the year, we had a global GDP on the positive side. Now, we’re looking at global GDP in the minus 3% to 5% for 2020”Dell (DELL) COO Jeff Clarke

Financials:

Fed stress test results show banks can handle harsh shocks

“The banking system has been a source of strength during this crisis and the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.” – US Federal Reserve Vice-Chair Randal K. Quarles

Consumer:

Consumers are looking forward to going to restaurants after the Corona crisis is over

“…we know that the consumer still wants to enjoy and in-restaurant experience. In fact, going out to a restaurant with friends and family is the number one activity consumers say they look forward to doing as the economy opens back up.” – Darden Restaurants (DRI) CEO Gene Lee

There will be fewer restaurants post covid as some will not recover

“The one thing I do believe is there’ll be less competition as we — and less restaurants as we move forward… I think scale is going to matter more than ever” – Darden Restaurants (DRI) CEO Gene Lee

Restaurants are struggling to rethink their operations

“We will be installing temporary barriers in approximately 100 restaurants in the next two weeks to try to improve this efficiency, especially in Olive Garden. We want to do that while maintaining the social distancing requirements. We’ll analyze the sales growth after we’ve installed those barriers and decide how many more restaurants we want to add at it too. So that’s a long answer to your question, but I think that there is some confusion out there. And we have to remember that once you’re past 25% occupancy, the six-foot restriction on social distancing trumps any other restriction there is, because you can’t get to 50%.” – Darden Restaurants (DRI) CEO Gene Lee

“…we’re trying to enforce everything. It’s awkward to go to a customer and tell them what proper behavior is, but we’re doing it. We’re also doing something that most restaurants I’m told are not doing. When you come to our restaurants, you have to give us your contact number. So, in case we have an incident on a particular, we can go back to the date you ate there and contact all of those people, and say we’ve had an incident here, you should be tested.” – Ark Restaurants (ARKR) CEO Michael Weinstein

You may have to get used to making your own bed at hotels from now on

“…you can see a scenario where the housekeeping model changes. And perhaps it’s — there’s no housekeeping during stay overs…. I think housekeeping is unnatural where you’ve got really a consensus building throughout the industry that perhaps no additional — you get a clean room, it’s certified of whatever ways the brands are going to use, they’re after that. Perhaps there has been no — no one else enters your room for the duration of it stay unless you opt-in some other benefits as part of that.”Park Hotels & Resorts (PK)  CEO Thomas J. Baltimore

Technology:

Companies are pulling ads from Facebook and other social media platforms with a view to influencing them to reform their platform

“Continuing to advertise on these platforms at this time would not add value to people and society,” the company stated. “We will be monitoring ongoing and will revisit our current position if necessary.” – Unilever (ULVR)

“We will take this time to reassess our advertising standards and policies to determine whether revisions are needed internally, and what more we should expect of our social media partners to rid the platforms of hate, violence and inappropriate content” – CocaCola (KO)

“We’re pausing our advertising until Facebook can create an acceptable solution that makes us comfortable” – Verizon (VZ)

“We will pause advertising on all social media platforms while we continue discussions internally, with our media partners and with civil rights organizations in the effort to stop the spread of hate speech”Starbucks (SBUX)

Covid has accelerated digital adoption

“…we’re seeing a true step-function change in our digital transformation. As you know, this has been an area of investment over the past few years as we’ve built our digital advantage, but COVID-19 has accelerated the pace.”Nike (NKE) CEO John Donahoe

“…the paper to digital transformation, if you think about it, is still very much in its early innings. There’s not a CIO I talk to now that is not working very quickly on digitizing on archaic paper-based processes and that obviously is a huge accelerate. With CIOs maybe four months ago, you’d get involved in the conversation, say, yes, yes, I need to do that, but I have these other 13 projects that I view as more mission-critical in the short-term to get over the line…whether you’re individuals, you’re a CIO, you’re a small business, digital is the – this is the digital hour. Digital as the buzzword of the day to continue transforming your business and even to get just baseline business continuity in a more challenging environment” – Adobe (ADBE) EVP and General Manager, Digital Media

“…the pandemic is happening during a period of exponential technology change, which was already driving entirely new ways of doing business. In our future systems research last year, we identified that the top 10% of companies in terms of tech adoption, depth and culture who are the leaders, are performing twice as well and is the bottom 25%. We believe COVID immediately widened that gap. We see the leaders doubling down on their investments, while the laggards recognize the speed to accelerate the pace of their transformation.” – Accenture (ACN) CEO Julie Sweet

Cloud is the biggest beneficiary

“The transition to a more digitally-driven future, which was already taking place, is accelerating at a pace few would have predicted three months ago. More firms are moving to the public cloud and upgrading their data and technology faster to meet the needs of a virtual workforce, manage volatility and continue to adapt, evolve and compete.”FactSet Research Systems (FDS) CEO Philip Snow

“…everybody’s realized that employees need to work from both the office and their home in an effective matter. So..I think it is becoming visible that more and more customers are contemplating, moving a lot of their back end infrastructure to the cloud as evident in the success of the cloud service providers”Palo Alto Networks (PANW) Nir Zuk

“The second trend we are seeing is that digital transformation is accelerating. You probably have heard this from other CEOs, and I’ve said several times before that, that we believe the enterprise of the future will be uncensored cloud-enabled and data-driven. That is a reality today.” – Hewlett Packard Enterprise (HPE) CEO Tarke Robbiati

Security is also benefitting

“We’re going to live in a much, much larger distributed environment, where ubiquitous connectivity will be essential, as essential as water and electricity are. And you must be secure. Therefore, we have to understand that security is a big aspect of the overall environment.”Hewlett Packard Enterprise (HPE) CFO Tarke Robbiati

Industrials 

HP noted supply chain constraints caused by Covid

“Supply chain was significantly constrained in Q1 and Q2, notably in components, commodities, logistics and manufacturing capacity. As a result, we’ve exited the second quarter with more than $1.5 billion in backlog in Compute, Storage, HPC, MCS, and Aruba, which in total represented two times the backlog level at the end of Q1.” – Hewlett Packard Enterprise (HPE) CFO Tarek Robbiati

Outlook for used car sales looks solid. Not so for new car sales. 

“At this point in time, the used car sales market is solid. The outlook remains solid for the rest of the year…we still see a challenging environment in the new car markets and in particular some inventory challenges through Q3”IHS Markit (INFO) Transportation EVP Edouard Tavernier


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