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Lorenzo La Posta| 03 August 2020

Spaghetti Western

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“Year 1862: amid the chaos of the American Civil War, the three gunslingers Blondie, Angel Eyes and Tuco (a.k.a. the Good, the Bad and the Ugly1) are competing to put their hands on a buried cache of gold, but onl– “...wait! I got it wrong. It was something like: “Year 2020: amid the chaos of a global pandemic, some industries thrive (the Good) as others go through a rough patch (the Bad), while countries, economies and societies strive to recover from their wounds (the Ugly)”. This year, the outcomes have been more extreme than most Hollywood creations. Let’s just hope there will be no sequel to this tragic period.

In the final scene of the movie, Blondie is pointing his gun at Angel Eyes: is he going to kill him? Consumer behaviours have always changed, but they never did so at such a speed. Online shopping was already eating away at high-street retail and streaming services had been attracting people away from cinemas for a while when the coronavirus hit. Lockdowns, social distancing rules and contagion fears have forced people to change their habits and rapidly adapt to a new normal, accelerating some pre-existing trends.

In general, e-commerce, logistics, videoconferencing, online gaming & entertainment and pharmaceuticals were the absolute winners at the expense of airlines, cruise ships, trains, cinemas, traditional retail and tourism & hospitality. Electronic Arts, a videogame maker, posted a spectacular 87% sales growth and 468% earnings growth compared to 12 months before; Amazon reported +40% in sales, +97% in earnings; Netflix +25% and +165%; PayPal +22% and +48%; eBay +7% and +58%; Domino’s Pizza +13% and +36%. Most companies in the latter group, instead, suffered large losses and, despite the financial aid received by governments, some have failed to survive. As conditions begin to ease and people go back to their pre-COVID lives, some earnings are flowing back to the most harmed sectors, but the permanent consequences of the pandemic are still to be evaluated. Certainly, there will always be demand for shopping, holiday, entertainment and transportation related services but the nature and intensity of the demand are evolving and this will ultimately determine who is going to survive in a post-pandemic world. Evolution and creative destruction are necessary and, after all, “when a man with a pistol meets a man with a rifle, the man with a pistol will be a dead man”2.

In the same scene, Tuco (the Ugly) is tied into a hangman’s noose: is he going to break free? While some companies managed to take advantage of this crisis, no country was left unharmed and all suffered severe humanitarian costs and vast economic damage. The United States saw their GDP contract as much as -9.5% over Q2 (the worst quarterly data since the late 40s) and the unemployment rate jump from 4.4% to 14.7% in April, to then retrace to a still elevated 11.1% as of June. European countries suffered worse economic contractions but displayed better employment data: Germany, Italy, France, Spain reported respectively -10.1%, -12.4%, -13.8% and -18.5% change in GDP (quarter-on-quarter) with unemployment rates at 4.2%, 8.8%, 7.7% and 15.6%. As lockdowns are lifted across the globe and economies go back to some sort of ’normality‘, businesses are doing as much as possible to recover some of the losses and return to profitability. Market sentiment is improving, as reflected in expansionary manufacturing PMI numbers: between 51.0 to 53.5 in July 2020 for the five countries, compared to 30.8 to 36.1 in April. Governments and central banks have offered enormous monetary and fiscal support to real economies and financial markets, but the long-term damage to businesses, consumers and institutions themselves is still being assessed and ultimately depends on many factors, some of which are still very uncertain (speed/length of recovery, potential second waves, progress with vaccines etc...).

Spoiler alert! In the actual movie finale, Blondie kills Angel Eyes and runs away with half of the treasure, Tuco breaks free and keeps the remaining half. We do not take sides when discussing which companies should survive, but we hope for the best possible outcome for people, economies and societies.

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