This is the traditional back in harness week – back to work, back to school. Needless to say, it will be anything but normal this year. I’m delaying the inevitable with a late-summer week in the Dolomites with my family but, even when I get back next Monday, it will be more of the same – working from home for the foreseeable future, albeit with fewer lunches in the garden and more at the kitchen table.
I wrote recently about what might go right. Reasons to be cheerful included a quicker than expected vaccine, prompting a more meaningful return to normality. This week, I want to consider the opposite case. What if we just have to get used to living with the virus – social-distancing, masks and all? What might the implications of that be for how we invest?
After the initial V-shaped recovery in markets, investors – particularly on this side of the pond – have already settled into that wait and see mind-set. The FTSE 100 has moved sideways since May, not exactly making a strong case for the old ‘Sell in May’ adage but not really disproving it either.
Markets are caught in a kind of two-way battle between positive and negative influences. On the economic front, massive stimulus continues, but fears for the impact on jobs of the end of furlough are mounting. As for the virus itself, Asia seems to be out of the woods, but Europe is struggling to contain second waves and the Americas, particularly south of the US border, seem to have lost control.
Just as different countries are coping with the pandemic with varying degrees of success, so too are individual companies. And the early sector by sector analysis – technology and healthcare good; travel, hospitality and retail bad – looks too simplistic. Stock-picking has never been more important and now might be a good time to look through the shares you hold to see how they are placed for this new but increasingly familiar world.
First, how defensive are they? Even apparently resilient stocks like Unilever admitted recently that its exposure to emerging markets like India and Brazil, previously a positive, was now more of a drag. That said, however, the company’s wide-range of product categories has helped – ingredients for home-cooking offsetting lower sales to restaurants, for example. Diverse products and a global footprint are precisely why fund managers love this stock.
Second, what does the cost-base look like? Lockdown was a catastrophe for businesses with high and inflexible costs, like airlines and hotel chains. Even here, however, generalisations can be unhelpful. Take Intercontinental Hotels, which is in the fortunate position of not owning its hotels but simply licensing its brands like Holiday Inn and collecting a fee on bookings. This kind of capital-light model is much better placed to survive even a collapse in revenues such as the industry experienced in the second quarter.
Rightmove is another company with low fixed costs and a revenue stream that has been surprisingly quick to pick up. Property searches were up by 50pc in the summer compared with last year as low interest rates, a stamp duty holiday and a desire to move to more lockdown-friendly accommodation has given the housing market a boost that few would have predicted.
Housebuilders and other construction companies will naturally benefit from a pick-up in demand, but they also demonstrate another key characteristic of the winners in the new normal, an ability to behave almost as usual in a socially-distanced world. Builders were among the first companies to get back to work thanks to most of their operations being in the open air and not requiring close contact between workers.
Construction is also a likely beneficiary of the government’s new-found interest in Keynesian stimulus. Reforms to planning regulations and more spending on infrastructure as decades of under-investment are reversed make an overweight in this area look sensible.
Stock-picking can also throw up opportunities in apparently unattractive sectors like retail where sentiment is weak and valuations more interesting. Some lateral thinking is required, though, to understand how the generally unpleasant new reality of shopping will impact different types of retailer. Hardest hit will be low-value, impulse areas like greetings cards, where you might previously have popped in for one item and come out with three or four. High footfall is needed, and unlikely in the new world, while the online alternative is simple and lacking in drawbacks (there’s obviously no need to try on a card).
By contrast, a luxury goods retailer like Burberry, is much less dependent on high volumes of customers. Its model demands just a few shoppers spending a lot of money each. Social distancing is less of an issue and the company’s exposure to recovering countries like China and Korea is a further bonus.
Another sector that is on the face of it a pandemic loser but may already have priced in too much bad news is restaurants. The case against is easy to make, with extra costs and lower revenues painting a bleak picture for the more marginal chains in an oversupplied market. But even here there is the potential for very low expectations to be exceeded. The decision by some restaurants to extend the ‘eat out to help out’ scheme through September shows the potential for innovative marketing to chart a path back to profitability.
As we settle in for what might be a long haul through the autumn and winter, the time devoted to picking the high-quality stocks that can adapt to a challenging new normal will repay the investment.
Published by Tom Stevenson, Investment Director, Fidelity International