Is Berkshire’s reputation at risk? How Macro and Micro aspects can change the way you invest

Summary

• Berkshire Hathaway’s ‘no-buy approach’ despite a slack in the stock market due to COVID-19 is raising questions on its reputation as ace investors known for market timing.
• The lack of activities from the conglomerate is signalling a warning to the investors that the market may not be hunky-dory, with the second wave of coronavirus outbreak anticipated, making future uncertain.
• Investors remain optimistic on industries such as Technology and Oil, which are expected to rebound because of unique products offered by tech companies meeting customer needs and increased government focus to build up domestic oil production.
• The banking industry could take more time to recover as economic recovery might be sluggish with slow growth in employment rate and more defaulters.

While most of the cash-rich investors are vying for undervalued stocks to bring the riches in the long-run, Berkshire’s shying away from the COVID-19 affected market is raising a question about its reputation of being the ace investor of the world. The company has also been underperforming massively compared to the S&P 500. The man, whose famous quote is "Be fearful when others are greedy and greedy when they are fearful”, seems to be extra cautious despite the talks of reopening of the economy worldwide. Warren Buffet, with a history of buying the correct stock at the right time, is sending warning signals to investors who are utilizing the COVID-19 slacked stock market to stock up shares.

Hailed as one of the world’s greatest investor, Warren Buffett-led Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) made no acquisitions despite stocks trading below their value in the COVID-19-led recession. Instead, Berkshire shed off its stake in four major airlines and cut back on holdings of Goldman Sachs and JPMorgan Chase.

While Mr Buffett’s selling of airline stocks still makes sense given the high fixed costs associated with the industry and travel demand yet to pick up in 2020/2021, cutting back on holdings of Goldman Sachs and JPMorgan Chase is debatable to some extent.

Macro-economic factors such as the effect of US-China Tension, diminishing GDP of the world and Australia, increasing unemployment, and the fear of the second wave of coronavirus hitting the market still linger. In the long run, industries such as Technology, Banking and Oil and Gas are expected to experience a rebound because of unique products that are arising amidst the pandemic, facilitating a smooth run and eventual opening up of economy with safety measures.

Let us have a bird’s-eye view of these sectors.

Technology industry

Technology has become a lifeline with businesses and individuals highly dependent on the tech sector for a smooth run of businesses and households. Players operating in the BNPL and EdTech space are experiencing a massive boom in their business because of their unique product features as they facilitate secure digital payments and enable online education from home in the times of social distancing.

COVID-19 pandemic gave an opportunity to Buy Now Pay Later (BNPL) companies such as Afterpay Touch Group Ltd (ASX:APT), Splitit Payments Ltd (ASX:SPT) and Zip Co Limited (ASX:Z1P) facilitate amid social distancing. Share prices of these companies are trading at record highs. Afterpay’s 1H FY2020 results demonstrated an increase of 109% in underlying sales at A$4.8 billion. ZIP witnessed record success by reporting revenue of A$45.0 million in Q3’2020, a 96% increase compared to Q3’2019. Splitit Payments recorded US$25.8 million in Merchant Sales Volume in May 2020, a rise of 321% over pcp and 39% over the previous month.

With lockdown and social distancing in place, people and children extensively prefer online classes over face-to-face tutoring, boosting the online education market considerably. Companies such as IDP Education Limited (ASX:IEL), G8 Education Limited (ASX:GEM), 3P Learning Limited (ASX:3PL) and Kip McGrath Education have experienced a surge in online courses enrolment with the social distancing in place. Post COVID-19 outbreak, weekly online classes of Kip McGrath Education Centres Limited (ASX:KME) reached 20,000 online lessons. Face to face tutoring, however, plummeted to 2,400 per week.

Despite the competition, the rise in revenues in businesses was driven by increased customer base across Australia and internationally.

Banking industry

Other than the digital services, banking sector has been severely affected by the increasing defaulters led by unemployment. Social distancing has also led to reduced physical visits with people mostly relying on digital services provided by the bank.

Bank stocks on ASX have experienced hit since the pandemic started wrecking the world economy, creating negative market sentiment. While the underperformance is making banking shares desirable for many investors who want to capitalize on the low prices for long-term gains, the looming economic uncertainty is very much visible.

With the second wave anticipated, along with increasing unemployment, the outlook of the banking sector is yet to turn towards positivity. For example, recently, Bendigo and Adelaide Bank Limited (ASX:BEN) announced addition of A$148.3 million as a provision for COVID-19’s probable impact in May. This additional provision was taken based on lower GDP and property prices and higher unemployment, a downward economic scenario with an extra cover for some business and consumers portfolio. The provision led to FY20 credit expense increasing by A$127.7 million. The credit losses reserves went up by A$20.6 million. The company has however announced dividend distribution on 16 June 2020, indicating stable liquidity.

Banking sector dynamics are currently dependent on technology that is bringing a revolution in the way banks operate. Artificial Intelligence in banking is gaining prominence, especially during the COVID-19 pandemic. Cybersecurity, fraud detection and prevention and risk management, and creating automated customer service are gaining traction.

The collaboration of Fintech companies with banks and other vendors are facilitating omni-channel banking solutions, creating opportunities to serve customers and clients better and thus gain in topline during the COVID-19 period.

Oil and Gas

ASX-listed oil stocks are facing backlash from investors as Brent crude oil futures is oscillating and at present trading at US$40.96, the closed price of 16 June 2020, a significantly low than the 52-week high of US$71.95. As per International Energy Agency (IEA), demand in 2020 is expected to decrease by 8.1 million barrels per day, only to increase by 5.7 million barrels per day in 2021, led by increased activity as economy reopens. Oil prices declined majorly as lockdown measures started to slowdown economy leading to a demand-supply gap, i.e. less demand and more supply of oil.

Australia, which is majorly an oil-importing country, is also investing domestically to gear up local oil production. Santos Ltd (ASX:STO), along with its JV partner Carnarvon Petroleum Limited (ASX:CVN), is operating a project called Dorado oil & gas JV development offshore WA and are currently entering the FEED Phase. In July 2019, Woodside Petroleum Limited (ASX: WPL) commenced production at Greater Enfield oil project and was expected to produce 60,000 bpd at full capacity.

With IEA forecasting an uptick in oil demand in 2021, and Australia set for more activities to promote the domestic supply of oil, the oil space looks attractive.