3 Things Under the Radar This Week

By Geoff Smith, Barani Krishnan and Yasin Ebrahim Read More...

By Geoff Smith, Barani Krishnan and Yasin Ebrahim

Investing.com – Although closing Friday on a down note, stocks rallied sharply this week as the coronavirus, earnings and employment data took most of investors’ attention (along with the wild swings in Tesla). But among things that may have gone overlooked, two U.K. companies that could be surfing the sustainability wave came into view.

The Trump administration kept coal as a talking point. And the Fed indicated that while the sidelines is still where it feels most comfortable, the impact of the coronavirus isn’t being ignored.

Here are three things that flew under the radar this week.

1. Will the Plastic Purge Create a Cardboard Boon?

With environmental and sustainability considerations playing an ever-greater role in the decisions of big institutional investors, it’s worth taking a moment to think how all those big passive bucks could move a stock that checks the right boxes.

Boxes being the operative word. Cardboard boxes, to be precise.

Two London-listed stocks offer interesting exposure to one of the great megatrends of the coming years: the shift away from plastic packaging.

Irish-based Smurfit Kappa (LON:SKG) and U.K.-based DS Smith (LON:SMDS), which is also Europe’s largest recycler of paper, both stand to benefit.

Smurfit stock rose more than 8% this week on the back of results that showed margins widening and debt (a perennial concern, given the cyclicality of the business) falling to the middle of its target range. While the breadth of its operations throws up a fair amount of problems – in the last two years it was expropriated in Venezuela and was fined $136 million for anti-competitive behavior in Italy – its core operations in Europe, the U.S. and emerging markets are solid.

DS Smith is arguably the more stable business by virtue of its concentration on fast-moving consumer goods, less prone to downturns than discretionary packages delivered by Amazon (NASDAQ:AMZN). It’s also less exposed to exotic places like Venezuela. It stands to be a big beneficiary of initiatives like that announced by U.K. supermarket chain Sainsbury’s, which promised last week to throw 1 billion pounds at getting plastic out of its supply chain, initiatives that are likely to become ever more common as the revolt against plastic spreads.

2. U.S. Sends $64 Million Canary Into Coal Mines

It sounded just like the kind of thing that would have gotten green groups all up in arms — a coal-first energy policy that conjures images of more carbon emissions in a world that needs exactly less.

Yet the U.S. Coal-FIRST — yes, in caps — initiative floated by Energy Secretary Dan Brouillette was clever enough in language that it got the attention it wanted without the bad press.

What Brouillette really announced was a $64 million “Flexible, Innovative, Resilient, Small, Transformative” initiative to develop the coal plant of the future needed to provide secure and reliable power to the U.S. grid.

“Coal is a critical resource for grid stability that will be used in developing countries around the world well into the future as they build their economies,” Brouillette said in a statement issued by the Department of Energy.

While from the text we could see where the energy secretary was going, those hearing the policy the first time — an announcement Brouillette chose to make during a speech at the Atlantic Council in Washington Friday morning — would be forgiven for thinking that President Donald Trump was trying to throw coal miners yet another lifeline ahead of his November reelection bid.

As Keith Johnson at foreignpolicy.com observed in an October post, “Trump came into the White House vowing to end the Obama administration’s so-called war on coal and Make Anthracite Great Again.”

“Instead, Trump is overseeing a cascading collapse of America’s coal industry, a trend that could have political consequences for him in the 2020 U.S. presidential election,” Johnson wrote, noting that there were eight bankruptcies filed by coal mining companies last year alone.

To be sure his words weren’t taken out of context, Brouillette said soon after announcing his Coal-FIRST policy that “the efforts we’re undertaking is not to subsidize the industry and preserve their status, if you will, as a large electricity generator.”

“It is simply to make the product cleaner and to look for alternative uses for this product or this commodity,” he said. “No one is going to deny the fact or argue with the point that coal as a percentage of U.S. electricity generation is declining and will probably continue to decline.”

“The evolving U.S. energy mix requires cleaner, more reliable, and highly efficient plants,” Steven Winberg, the DOE assistant secretary for fossil, added in the statement. “Technologies developed for the Coal FIRST initiative will lead to just that — reliable, highly efficient plants with zero or near-zero emissions.”

3. Fed Factoring in Coronavirus

For months, traders have been eager to find out what additional factors, apart from the pace of inflation, will drive a material risk to the Federal Reserve’s outlook and force it off the sidelines. But Fed Chairman Jerome Powell has given little away.

That all changed early this week when the Fed chief identified a new risk to the central bank’s outlook on the economy: the coronavirus.

“More recently, possible spillovers from the effects of the coronavirus in China have presented a new risk to the outlook,” Powell said in the latest monetary policy report, submitted to Congress on Friday

“The recent emergence of the coronavirus, however, could lead to disruptions in China that spill over to the rest of the global economy. Amid weak economic activity and dormant inflation pressures, foreign central banks generally adopted a more accommodative policy stance,” the Fed chairman added.

The Fed’s worries about the risk to its outlook are not without merit, with analysts predicting that the virus will do most of its damage in the first quarter of this year.

Goldman Sachs said the impact of the disease would lower global GDP by up to 2% in the first quarter, 1% directly from China and about 1% from spillover effects.

Whether the impact of the virus will represent a material risk to the U.S. central bank’s outlook remains a hot topic of debate.

“The near-term impact is quite large,” Goldman Sachs said. “What happens to 2020 as a whole really depends on how quickly the episode is brought under control.”

The Federal Reserve fingerprints are all over the more-than-decade-long bull run in stocks. Its efforts to steady the repo market, which began in October, have coincided with a sharp upswing in stocks. But those hoping for the Fed to act sooner rather than later could be left disappointed.

“The new coronavirus outbreak abroad has created some new risks to the near-term external growth backdrop, but there is little apparent reason for monetary policymakers to consider rate cuts at the moment, and we continue to expect the Fed to sit on the sidelines through 2020,” RBC said in a note.

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