Toilet paper and tele-commuting – investing for post COVID

The coronavirus pandemic was the sharpest shock to markets and the economy in modern history. Our lives, and the businesses we invest in, will be different post COVID … but many things will be the same. It’s safe to predict that some changes will be temporary. After all, how much toilet paper do we need to hoard? Other changes will be permanent, and some that seem permanent won’t be. Figuring out which is which is the unique challenge faced by investors today.

Perhaps the most obvious changes to anticipate sticking are trends that were already in motion. For example, online shopping was a secular trend that the pandemic has magnified. E-commerce sales are up 50% from pre-crisis levels, a three to five year acceleration in online penetration. This will benefit our investment in Amazon, the e-commerce poster-child, as well as Target and Nike which have both successfully transitioned to retailing in a digital world.

Consensus has moved quickly to assume other changes will stick. The most widely accepted is that many of us will continue to work from home after the pandemic passes. The implications of this are far reaching if true: more video conferencing, less travel and an excess of office space. But if most of us go back to offices and travel returns then markets are too pessimistic in some cases. While the path for business travel is less clear, leisure travel is likely to recover more quickly. We have recently built a position in Aena, the Spanish airport operator, which should see earnings rebound as leisure travel recovers.

There are many confident and compelling-sounding hypotheses, but confirmation will come more gradually. Through this crisis we have found opportunities to invest on both sides of the debate, focusing on winning businesses with idiosyncratic fundamentals. We will continue to respond to evidence as trends emerge, and we think the Alphinity investing process is ideally positioned to help us evolve the portfolio.

 

Author: Lachlan MacGregor, Portfolio Manager