September 28, 2020 BARRON’S M11
MarketView
Oil’sDemise“GreatlyExaggerated”
Equity Research
Wells Fargo Securities
wellsfargo.com
Sept. 25: It is hard to overstate how cruel
2020 has been to oil-and-gas equities. Be-
yond the short- to medium-term headwinds
of coronavirus, longer-term questions con-
tinue to pop up. It seems nearly every week
(and sometimes multiple times per week)
there is a new headline about a city, state/
province, or country planning to mandate
low or zero tailpipe emission vehicles within
the next 10 to 20 years. Multiple high-pro-
file companies have made promises to cut
their net emissions as soon as 2030. “Net
Zero” by 2050 has become so common that
it hardly rates a headline. [But] it is worth
considering the amount of material and en-
ergy that will be required to build and sus-
tain this new green world. Good luck haul-
ing all of those windmills blades and mining,
processing, and creating all of the metals
and carbon fibers without the oil-and-gas
sector. Taking electric vehicles from 2% of
new cars sold to 20% or beyond is going to
put a lot of strain and stress on that supply/
manufacturing chain system. Expect more
negative headlines about those costs (visible
and hidden) in coming years. It may be a
while before oil enjoys a “boom” but its “de-
mise has been greatly exaggerated,” to bor-
row a phrase, in our view.
—ROGERD.READ,LAURENHENDRIX
World Trade on the Upswing
Economic and Financial Analysis
ING
ing.com
Sept.25: Imports and exports have been in-
creasing in most countries and regions since
hitting a low point in May, when world trade
volumes were down 18% from a year earlier.
The recovery promises to have been sus-
tained in the rest of the third quarter by in-
creases in manufacturing and export orders,
and improving consumer confidence.
The outlook for trade in goods depends
on the extent of new restrictions aimed at
preventing the spread of the virus, espe-
cially those affecting manufacturing and
supply chains. Some capacity constraints re-
main in ocean freight, relating to container
and equipment shortages. Air freight has
seen large reductions in cargo capacity with
the restrictions on passenger travel. Travel-
related services fell 26% in the first quarter
and are likely to have remained low, while
other traded services, including manufactur-
ing services such as processing and assem-
bly, and commercial services, are likely to
be tracking the recovery in goods trade.
—JOANNAKONINGS
U.S. Bond-Fund Redemptions
EPFR Global Navigator
Informa Group Limited
informa.com
Sept. 25: EPFR-tracked bond funds ex-
tended their current inflow streak to 24
straight weeks going into the final days of
the third quarter. But, for the second week
running, the net total was the smallest since
the streak began early in the second quarter.
Behind the headline number, U.S. and high-
yield bond funds experienced their heaviest
redemptions since March, and European
bond funds recorded consecutive weekly out-
flows for the first time in over five months.
Inflation-protected and municipal bond
funds posted inflows for the 15th and 20th
week in a row, respectively, and mortgage-
backed bond funds absorbed fresh money
for the 13th time in the past 15 weeks, while
redemptions from convertible bond funds
hit a 25-week high and bank-loan funds
chalked up an outflow for the seventh
straight week and 14th time in the past 15.
While flows to high-yield bond funds
stalled during the week ended Sept. 23,
emerging-markets bond funds continued to
see flows recover from the lows of March.
The latest inflows were the 12th in a row for
EM bond funds. As was the case the previ-
ous week, the positive numbers were largely
due to the robust flows into China bond
funds, which took in over $1 billion for the
first time. That trend may hit a wall in Oc-
tober, according to Tim Cheung and Riki
Zhang from EPFR sister company Informa
Global Markets. In a recent note, they ob-
served that China’s central bank is showing
a general reluctance to boost market liquid-
ity. That, they believe, “is reinforcing the
market perception that the monetary easing
cycle is already largely over and borrowing
costs will start creeping upward...there is a
good chance we will see a significant selloff
[of Chinese bonds] in October.”
—CAMERONBRANDT
The Attraction of Preferreds
Global Strategy Quadrant
Citi Private Bank
citi.com
Sept.24: Ranked above equity (without vot-
ing rights) and mainly issued by financials,
preferred stocks have been a fantastic source
of high current yield. Due to the lack of new
issuance and the demand for higher yields,
preferred stock valuations have risen over
the years. However, with U.S. preferred
yields averaging 4% and European yields,
5%, value still exists. In many instances, val-
uations of preferred shares are comparable
with similarly rated high-yield bonds...
We continue to feel comfortable moving
down in capital structure for higher yields in
preferreds. In our view, large banks have en-
tered the current economic slowdown from a
position of fundamental strength. Dodd-
Frank and Basel III regulations have re-
quired banks to increase their capital base
substantially. While common dividend cuts re-
main an area of concern for a few banks, we
don’t believe preferred dividends are at risk.
—STEVENWIETING AND TEAM
Betting on a Weaker Dollar
Weekly Update
The Aden Forecast
adenforecast.com
Sept.24: The U.S. dollar index bounced up
this week. This isn’t unusual following the
dollar’s steep decline, and it could rebound
further in the weeks ahead. But the dollar
is still bearish below 97.50 and it’ll stay very
weak below 95. That is, once this rebound
rise is over, the dollar remains poised to fall
much further, and the currencies will head
higher. Other assets will also get a boost
from a weaker dollar. Continue to hold the
currencies we’ve been recommending: the
Australian dollar, Canadian dollar, euro,
Swiss franc, and UDN [Invesco DB US Dol-
lar Index Bearish], the bearish dollar ex-
change-traded fund. Even though they’ve
been under pressure, they’re still bullish,
and we’ll buy more on further weakness.
—MARYANNE ANDPAMELAADEN
Trump v. Biden on Taxes
Election Watch
UBS
ubs.com
Sept. 23: The disparity in the two [presi-
dential] candidates’ fiscal policy platforms is
rather straightforward. Absent any details
to the contrary, we are obliged to conclude
that President Trump would rely on deficit
financing to reduce tax rates while simulta-
neously increasing federal investment in the
nation’s physical infrastructure. Biden pro-
poses to reverse the tax cuts enacted in
2017 and redirect the resulting proceeds to-
ward combatting climate change and ex-
panding health-care coverage.
However, the size and scope of fiscal
stimulus planned by a Biden administration
are also much larger than the ones contem-
plated by the president. The net result is to
neutralize some of the adverse effects of tax
increases on the rate of economic growth. In
either instance, whether the president is re-
elected or voters choose the former vice
president, the size of the federal deficit is
destined to remain large.
—SOLITAMARCELLI AND TEAM
To be considered for this section, material, with
the author’s name and address, should be sent
”Netzero[emissions]by2050hasbecomesocommonthatithardlyratesaheadline.[But]itis
worthconsideringtheamountofmaterialandenergythatwillberequiredtobuildandsustainthis
newgreenworld.” ——ROGERD.READ,LARUENHENDRIX,WELLSFARGOSECURITIES
This commentary was issued recently by money managers, research firms,
and market newsletter writers and has been edited by Barron’s.