Blog: You, us, everyone

Consumers are hooked up with the convenience of e-commerce. It is easy, quick, and comfortable. Customers have fallen in love with the near-instantaneous gratification of online retailing as delivery takes less time than for them to go to the stores, do the shopping, and then return home.

More importantly, consumers are the backbone of the economy which is running relatively well these days, especially in the US. The FED is targeting a 2% inflation rate with GDP growth being around 2.2, but it slowed in Q1 to 1.6%! Hence there are different scenarios out in the market, they range from no-landing with GDP growth re-accelerating and with some stickier inflation as well as a hard landing, while still, some analysts forecast a recession.

Each of these scenarios has a different outcome for asset prices and consumer behavior. Irrelevant of the cyclicality of the economy, consumers will keep shopping online and we would expect these stocks and sectors to continue to outperform. Obviously, quality remains a key attribute in the selection process.

Why does the combination of quality and cyclicality tilt make sense in the present context? If the economic acceleration were to occur soon, the market would by far favor more low-quality cyclicals and small caps, which have been underperforming for quite some time now. The market continues to argue that much of the upside in economic growth over the past year has been the result of government-initiated consumer spending, funded by growing budget deficits. With this trend not finding any end, the market may continue to do the shopping too!

Given the above, the present economic conditions favor a no-landing outcome which may result in the fact that looking at e-commerce opportunities is more important than ever. In particular, the DM industries are dealing with the crowding out problem of smaller businesses, which will accelerate the pricing power of some key players. In extension, this suggests that the major equity indices are overvalued while the best opportunities are likely beneath the surface in underappreciated key players in the field of e-commerce which will continue to benefit from the secular growth trend of changing consumer patterns.

Investing in the no-landing scenario

With the e-commerce opportunity highly efficient and mostly exploited, taking advantage of the consumer boom becomes difficult. However, with the number of parcels being shipped every day, the air freight & land-based logistic services companies are required to change their distribution model. These service providers have developed and articulated over the last 3 decades networks to cover the distribution via long-haul air routes for years. But for now, the challenge is to address the short-haul markets.

In contrast with long-haul transport, which is a point-to-point business that can be organized through unionized pilot contracts, resulting in high fixed costs, short-haul transport is subject to demand and therefore requires higher flexibility from the staff. Therefore, variable costs will increase while the level of service will remain constant. It is estimated that developing granular distribution routes may take five to 10 years, although several major players already invested hundreds of millions of dollars to improve their networks, thereby reducing long-haul capacity and shifting air freight to trucks. In addition, two major parcel services have acquired companies that specialize in last-mile deliveries, boosting their short-haul offerings.

The whole story doesn’t end on the ground, but rather in the air. The shift may put smaller airlines and charter services into the spotlight as these providers can provide an immediate and important capacity with a high degree of mobility.