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I'm an entrepreneur at heart, directly involved in the startup phenomenon (I dedicated a big chunk of the last ten years to building sound business models for my companies). Since 2020 has been a remarkable year for obvious reasons, I thought it would be a good idea to share some of my thoughts with you about what's been happening lately in my field of expertise.
The premise
Many companies are facing an identity crisis, as the global recession is quickly brewing up. The Covid-19 pandemic has put a halt to a robust economic expansion, triggering a sharp rise in unemployment and forcing governments all over Europe to find new ways of avoiding collapse.
While European policymakers focus on getting economies back on their feet, the crisis could signal the beginning of a new dawn for EU businesses. Could it really?
An in-depth look at statistics
European startups funding got slashed by 20% in the first half of 2020. This figure might seem significant, but it's still one billion dollars higher than the 2018 numbers. And there's something else too: 2019 marked the most significant funding for venture funds. Ever.
Graph showing the evolution of EU startup investments from 2016 to 2020
Source: crunchbase.com
To put things into perspective, 904 EU startups raised funding above $2 million in the first half of 2020. The year before, nearly 1.000 companies raised at least $2 million.
As for leading markets, the U.K startups attracted the most funds during the first six months of 2020 (twice more than the second place holder, Germany). France, Sweden, and Switzerland follow next.
Graph showing the volume of startup investments in five leading EU countries
Source: crunchbase.com
Inevitably, I need to draw a parallel between Europe and North America, the Land of Opportunity for new companies. Europe's startup business peaked at a different time than its U.S counterpart. For Europe, the upward trend in startup funding began in 2018 and carried on until Q4 2019. For the Americans, 2018 was the pinnacle.
I don't want to bore you with too much data, so let me tell you why things are about to change for European startups. It has to do with how fast and prompt they reacted to the pandemic.
A strong response to Covid-19
Many European countries have managed to get the pandemic under control faster than the U.S, while also preserving jobs better during the lockdown, rather than allowing unemployment to grow at an alarming rate.
Therefore, EU startups are now prepared to receive with open arms all skilled people who lost their jobs in the U.S. This truly is an excellent opportunity for European businesses to develop further and see their stocks grow in the short term.
Naturally, the sectors most likely to see a boost soon are those that amassed increased funding for quarter over quarter and year over year: biotechnology, e-commerce, science, and health care.
That hardly comes as a surprise. Numerous European startups from these sectors came forward with unique products to combat the pandemic. It was an extraordinary moment for every player, big or small, to flex their muscles and show what they can achieve.
Special mention for e-commerce companies that have garnered plenty of publicity and funding during the global lockdown.
Three new EU companies breached the $1 billion valuations
Three European startups joined the select unicorn group during the past quarter.
A couple of consistent fund injections (one worth of $240 million and another $35 million) were enough for Berlin-based Lilium to reach $1 billion valuations in June. The company activates in the airline industry.
The UK-based car platform Cazoo joined the unicorn ranks, achieving another impressive feat along the way: it became the fastest European company to get to $1 billion, less than 18 months from its founding.
Workhuman, headquartered in Dublin, provides cloud-based software management solutions. By raising $122 million from existing shareholders the past quarter, Workhuman reached a $1.2 billion valuation, a result that placed it on the unicorn board.
What about Romanian startups?
I left my beloved country last for a good reason: I plan to talk in detail about something that caught my eye about Romania's startups.
According to a recent study published by Dealroom, Romania ranks first among Central and Eastern European countries when it comes to investments in local startups in the previous seven years.
Since 2013, Romanian startups have raised $1.3 billion in investment, same as Estonian startups. Poland occupies third place with $0.9 billion investments, followed by Lithuania ($0.6 billion) and Hungary ($0.3 billion).
In the last decade, the Central and Eastern European region has created eight unicorns - private companies valued at $1+ billion. Romania gave two unicorns from this list: UiPath, a company specialized in providing software solutions, recently valued at over $10 billion*, and eMAG.
*Quick note: UIPath leveled up to decacorn status now, exceeding $10 billion in market value.
In the first half of 2020, more than 20 tech Romanian startups raised capital from venture capital funds, business angels, and crowdfunding.
The burning question – to launch or not to launch a startup in 2020?
I think we could witness the European startups' turn to take the spotlight, ahead of their U.S and Asian equivalent. But only time will tell how things are going to unfold. I'm optimistic.
Lately, I’ve spent more time than usual analyzing the markets. Just like most investors, I was interested in how they will react to this Covid-19 pandemic. Do you know what caught my attention? Not the stock market rising from the ashes like a Phoenix. Or the incredible gold rally. Not even what happened to oil from February up to now. No, I’m talking about something else: soft commodities.
Stay with me, and I will tell you why the soft commodities market is the next big thing I will put money in.
Numbers don’t lie
Cocoa, coffee, cotton, sugar. Four of the goods we all use in our everyday lives. And guess what? It happens they’re among the best performing financial assets nowadays. For example, sugar prices jumped 20% since May. Cocoa, coffee, and cotton became a lot more valuable as well, posting double-digit figures increases as well.
But here's the exciting thing: between March and May, all these common goods were cheap as chips. The pandemic was taking its toll on them too. Prices were extremely low, and nothing was pointing at a change.
Naturally, I became very curious to find reasons for this sudden shift. From May until now, deep into August, the soft commodities market thrived. Just a couple of months earlier, prices were down below sea level. So, I started digging out deep in my quest to find some answers and a potentially exciting trading opportunity.
Let me tell you some of the reasons why I believe the soft commodities market is looking better than ever.
Supply shortages got everybody worried
Brazil and India, two of the world’s biggest soft commodities producers, are forced to deal with the harshest effects of the Covid-19 pandemic. They’re both in the top three worst-hit nations globally. Hundreds of thousands of people have already died there.
Brazil is the largest manufacturer of coffee and sugar, with tens of million bags of coffee and hundreds of million metric tons of sugar cane produced in 2019 alone. India produces the most cotton on earth. Even more than Europe makes with all its 40+ countries.
But here’s the issue. Investors anticipate supply constraints are closing in, as both Brazil and India will need to put their economies back on track when the crisis ends. With smaller supplies on the horizon due to workforce shortages, prices for soft commodities futures can only go up. Another reason for the bullish trend is that many people are stuck at home, and the demand for goods such as coffee and sugar tends to rise under these circumstances. Also, as soon as the economy starts recovering, we can only witness a boost in demand.
The U.S Dollar, no longer safe
The Dollar Index, which measures the power of the U.S Dollar compared to several other major currencies, has recorded its worst month in almost ten years. That spells excellent news for soft commodity prices, as a weaker Dollar makes it more affordable for importing nations to buy commodities priced in the U.S. currency.
Investors betting against soft commodities had to cut their short positions. In early August, the "performers" were the coffee shorts, with more than 19,000 contracts wiped out of existence.
Fewer bearish supporters of soft commodities mean there's more room for optimism in this market. Together with improved market sentiment, prices should continue to rise until something truly unexpected occurs. For the moment, investors don't expect such a thing to happen.
Game over for the gold rally – or so it seems
Gold lost 5.72% on Tuesday, August 11, marking the most significant single-day decline in seven years. It also fell below $1.900/ounce for the first time since July 24. That's quite a negative record.
I did my homework and checked what investors believe happened. Here's what I found out: many experts believe gold is overbought. Optimism is growing among small businesses worldwide. The risk-appetite attitude seems to return (slowly, but surely).
Don't get me wrong: that doesn't imply people stopped looking for safe havens. Not by any means. It just shows that gold might no longer belong in this category anymore. I think the U.S Dollar faces the same issue as well.
It always happens like this: in the beginning, investors run to what they believe is their safest bet. As soon as things appear to take a turn for the better, they shift by 180 degrees. And then other opportunities start to look more clearly.
Final Words
The markets remain uncertain, as the pandemic is far from over. Now we need to protect our investments more than ever since danger looms.
What do we have left when gold and the U.S Dollar stopped proving their utility as hedging instruments? There's only one market we can turn our attention towards. And that's precisely the soft commodities products I've been talking about. I don't know what you're going to do, but I'm counting on them.
Make sure you follow me on Twitter and LinkedIn for more useful insights & commentary!
The past
After a mixed Q1 earnings performance (see my previous blog post) in which I predicted and, eventually, saw most economy sectors under-performing up to the brink of bankruptcy (with famous „victims” such as Hertz International or LATAM Airlines), and the sheer rise to stardom of „work-from-home” sweethearts Zoom, Microsoft Teams, Slack, it’s easy to say that the Corona pandemic took a carefully selected toll on the business world.
As previously predicted, the superstars of Q1 have been the technology behemoths, starting with the FAANG group (Facebook, Amazon, Apple, Netflix, and Alphabet) and continuing with the fresh princes: Zoom, Slack and other collaborative tech companies.
The future
I already mentioned in my previous analysis that, even though Q1 has been very good for business for the companies above, Q2 will not be so generous. More and more people find themselves out of a job, companies close or at least reduce volume, investment budgets disappear, research and development go bust, and consumers become more and more selective with their cash.
Macroeconomic data, in the US and elsewhere, fully supports the statement above and paints a very grim picture: US unemployment close to 25% (that’s more than 40 million people having no other choice but to apply for government help), a GDP drawdown of 34% according to analysts at Goldman Sachs.
It’s a dire future they predict, and it could get nasty for most S&P members. According to a research paper from factset.com, for Q2 2020, the estimated earnings decline for the S&P500 is 43.4%.
If 43.4% is the actual decline for the quarter, it will mark the most significant year-on-year decline in earnings reported by the index since Q42008 (-69.1%). On a per-share basis, estimated earnings for the second quarter have decreased by 35.9% since March 31st.
*image source: factset.com
I see most, if not all, market sectors dropping in terms of revenue, earnings per share, target prices, P/E ratios. In part, due to the global exposure most of them have which brings more considerable influence, and from Covid-19 induced crisis but also because there’s no winner when everybody’s worrying for tomorrow.
In an interconnected global economy, there can no longer be a superhero company floating above all else; we’re all in the same predicament.
Murdered by numbers
Don’t let yourselves be fooled by the YTD performance of US indices:
*image source: Yahoo Finance
By looking at the figures above, one might think the markets are all but immune to the effects of the pandemic over the real economy. It’s my firm opinion that the fairytale in which the markets are living right now is soon to end, more precisely, with the Q2 earnings releases.
In terms of business sectors, I prefer to focus on a 4-pillar aggregate:
Here’s my vision over these diverse and peculiar sectors and how I see the performance on Q2 earnings:
*forecasts from money.cnn.com & TipRanks
Disclaimer:
This is not a place for the giving or receiving of financial advice, advice concerning investment decisions or tax or legal advice. This is being based on personal opinion and experience and it should not be considered professional financial investment advice.
Take into consideration that most target prices from the table above are on the optimistic side as pundits, experts, and analysts are always considering the “market sentiment” in their thought process, and the overall feeling of the market right now is one of “immunity” to the effects of the pandemic.
Delving deeper into the core of the problem, I say the economy is not reflected in the equity markets, and there’s been a division between market sentiment and market performance.
The conclusion
In times of uncertainty and crisis, people and markets alike return to the basics, which, in capital markets, boils down to coming back to the fundamentals. Caution is the word of the times, and this caution, combined with the weaker financial performances of global equities, will push the markets lower - the general decrease in prices will come.
I've always put my money where my mouth is; this is why I'm all-in shorting the markets until the end of the year. When life gives you lemons, you make lemonade. When, in turn, it gives you a discount, you buy full-on, pedal to the metal. Because it's smarter to ride the wave and not go against the giants of the global economy: USA, I guess ? & China
Sit tight, prepare yourselves and your investment portfolios for big moves, and stay calm – these are the steps I’m taking and have proven to be the right ones in 2008 and any other crisis before and after.