Penn Wealth Publishing

2020.05.17 Penn Wealth Report Vol 8 Issue 03

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6 penn wealth Report voluMe 8 issue 03 17 May 2020 Copyright 2020. All Rights Reserved. tactical Awareness Going into 2020, the global economy appeared relatively strong and getting stronger. Now, after a city named Wuhan unleashed a pandemic on the world, the deck hasn't been reshuffled, it has been thrown up in the air. Areas that appeared to have promise—like emerging markets and the energy sector—now look toxic. Many undervalued retail names may now be headed for bankruptcy, or restructuring at least. And the global supply chain has been massively damaged. But all the news is not bad. We were already bull- ish on the health care sector going into the year, from major pharmaceutical firms to medical instrument and device makers. e virus has supercharged the sec- tor going forward, and opportunities abound. While many smaller firms will never come back, the ones in the right arena and with the right mix of products and services will excel. More than at any time through- out our generation in the business, from before the tech bubble to after the financial meltdown, success or failure will come down to individual stock selec- tion: picking the winners and avoiding the losers like the plague. Let's take a look at some themes we see developing. China will ultimately pay for the global supply chain disruption. e pandemic has been one of the most destructive economic forces ever foisted upon the world. In our opinion, China owes countries around the globe something to the tune of $25 trillion, and that is being kind. Of course, we will never see one yuan in compensation, but that doesn't mean the com- munist nation won't pay in other ways. Europe highlights this change in attitude. e continent, arguably America's most important trad- ing bloc, has been gravitating away from the US and towards China over the past decade. Even stalwart US ally Britain has raised the Trump administration's ire over its decision to increase trade with China post- Brexit, going so far as to ask for Huawei's assistance in building out the nation's 5G network. at is chang- ing rapidly. Politicians across party lines in Western Europe are suddenly reevaluating their economic ties to the country which brought about the pandemic. Here is what we see happening: An ever-increas- ing number of countries around the world will begin reducing their dependence upon goods made in China. Right now, for example, something to the tune of 85% of all active pharmaceutical ingredients in drugs used in the US originated from China. From the individ- ual up to the highest levels of government, expect awareness of that problem to slowly drive plants out of China and into other countries with similarly low labor costs—if not directly back to domestic shores. Hoarding wasn't the only cause for the toilet paper shortage in the US. e pandemic served as an air- to-ground missile striking at the heart of the global supply chain. Want a glaring example? Procter & Gamble (PG $117), maker of toilet paper and a num- ber of other toiletry items that went missing from store shelves for the better part of two months, has approx- imately 400 suppliers in China that make and/or ship around 9,000 materials for the company's prod- ucts. at companies like P&G failed to perform due diligence or proper risk management is a topic for another day; they should now have received the message loud and clear: diver- sify away from China. Expect to see a record num- ber of plants being built in places like Vietnam, Indonesia, ailand, Singapore, Malaysia, and the world's biggest democ- racy—India. e US enjoys good relations with all of those countries, many of whom share a deep mistrust of China. Also, look for the new USMCA to bring more plants to Mexico, another source of low-cost labor. Seek out emerging market ETFs with low relative exposure to China. The global pandemic has changed the game for 2020; let's consider a few of the opportunities we see forming. Spring 2020 Outlook Asset Allocation & Outlook Expect these boxes to be less prevalent—and stealthier—moving forward

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