Welcome to the shortage economy. As we enter into the third year of the pandemic, COVID has truly turned the world upside down. Well over a million Australians have contracted the virus and the impacts on the economy have been numerous and large. None so much as the shortage economy Australia finds itself in right now.
From an abundant western society with just in time logistics, we now face crippling shortages of labour, materials, shelf stock and essential services. It’s most obvious in any supermarket you visit where currently we see sold out fruit and veg, pharmaceuticals and the old pandemic favourite, toilet paper. Demand and supply patterns have been thrown in disarray and this is putting a huge challenge onboth companies and individuals alike.
We believe there are ways this can benefit your portfolio, being long in the local well stocked retailers, having exposure to key commodities who are in short supply and gaining exposure to areas of new or substitute demand. A good example is in battery minerals, where Australia is poised to be a massive exporter to the world as it decarbonises. The graph below demonstrates that prices for the commodities have rallied massively in the case of spodumene/lithium over 8 times from the sectors brush with insolvency in 20201. But mines are taking much longer to commission and build due to lack of labour and equipment, particularly in our West. Buying into companies producing the other critical battery minerals like nickel, cobalt and graphite is also adding value more recently. Even fossil fuels like gas, oil and coal are spiking, mainly because supply is coming on and there is a delay between decarbonisation aspirations and the time taken to achieve them in our disrupted reality.
Source: SMM- Shanghai Metals Market
Staff shortages are acute across so many fields in Australia right now that it’s likely that employers will have to provide better pay or conditions to attract or even hold staff which could push wage inflation higher. The much-touted Great Resignation has been mixed with a huge surge in COVID infections, taking the cumulative cases in Australia to well over a million as daily case loads continue to climb. Absenteeism is understandably rife. Many front-line care and essential workers are burned out after such a long and tough campaign. This means wages are increasing rapidly and all the zero rates in the world are not going to change that as central bank zero rate setting mistakes stoke huge inflationary momentum. The US just recorded a 7 per cent inflation rate, the highest since 19822 and one wonders whether a similar trajectory is in store for us down under.
There are risks for share prices too. Margins are key for profitability in this explosively inflationary environment. To justify a position in your portfolio you should be assessing whether stocks can hold their margins when all these input costs are rising. We have seen several retailers come out and warn profits will be down on rising costs of doing business, Woolworths was the largest company to mention this before Christmas3, but certainly won’t be the only ones impacted. In the essential services example above, we see wages and restricted services such as elective surgery impacting healthcare services providers such as Estia and Regis in Aged care and hospitals like Ramsay. While these short-term margins are a headwind, it’s not hard to see that the long-term ramifications of the pandemic may well mean the value of this healthcare infrastructure will actually go up.
There are wild card sectors too. Travel and entertainment is still hard, until the virus runs through. Flights are being cancelled due to lack of staff and capacity is also being cut due to low demand. Accommodation and holiday parks near the population centres may continue to be the winners for now. Empty sports and arts festivals threaten the solvency of some of these events. We continue to like the casinos due to their property backing, as we saw a slightly better bid for Crown recently from Blackstone. So, while the milder variant Omnicom rages through our economy, it’s important to remember that these disruptions won’t last forever but you want to keep your portfolio on the right side of this squeeze. Stay safe out there.
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