Post-Covid in­vest­ment

Look be­yond the ob­vi­ous – some lat­eral think­ing can pay off when pick­ing stocks in the new re­al­ity Tom Steven­son

The Daily Telegraph - Business - - Front Page - TOM STEVEN­SON Tom Steven­son is an in­vest­ment di­rec­tor at Fidelity In­ter­na­tional. The views are his own. He tweets at @tom­steven­son63

This is tra­di­tion­ally the week when we get back in the har­ness – back to work, and back to school. Need­less to say, it will be any­thing but normal this year. I’m de­lay­ing the in­evitable with a late-sum­mer break 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 mind­set. 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. 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, such as Unilever, could have prob­lems. The Mar­mite maker has ad­mit­ted that its ex­po­sure to emerg­ing mar­kets like

In­dia and Brazil, pre­vi­ously a pos­i­tive, is now more of a drag. That said, how­ever, the company’s wide range of prod­uct cat­e­gories has helped – in­gre­di­ents for home cook­ing off­set 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, in­clud­ing 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, such as 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 50pc higher this sum­mer than last year as low in­ter­est rates, a stamp duty hol­i­day and a de­sire to move to more lock­down-friendly homes boosted the hous­ing mar­ket in ways 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 be­cause most of their op­er­a­tions are in the open air, and do not re­quire close con­tact between work­ers.

Con­struc­tion is a likely ben­e­fi­ciary of the Gov­ern­ment’s new­found in­ter­est in Key­ne­sian stim­u­lus. Re­form to plan­ning reg­u­la­tions, and more in­fra­struc­ture spend­ing as decades of un­der­in­vest­ment are re­versed make an over­weight in this area look sen­si­ble.

Stock-pick­ing can also throw up op­por­tu­ni­ties in ap­par­ently unattrac­tive in­dus­tries, such as re­tail, where sen­ti­ment is weak, and val­u­a­tions are 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 such as 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 lacks draw­backs – there’s ob­vi­ously no need to try on a card.

By con­trast, a lux­ury goods re­tailer, such as 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, in­clud­ing China and Korea, is a fur­ther bonus.

An­other in­dus­try 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, time de­voted to pick­ing high-qual­ity stocks that can adapt to a chal­leng­ing new normal will re­pay the in­vest­ment.

Stock-pick­ing can throw up op­por­tu­ni­ties in ap­par­ently unattrac­tive in­dus­tries, such as re­tail

Con­struc­tion com­pa­nies will ben­e­fit from a pick-up in de­mand as they can con­tinue al­most as usual in a so­cially dis­tanced world be­cause most of their op­er­a­tions are in the open air, and do not re­quire close con­tact between work­ers

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