Holding their own?

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Amid continuing disruption in global markets, which sectors can global investors best explore to seek value and opportunity? Here, Newton Investment Management portfolio manager Paul Flood and Mellon senior portfolio manager Leigh Todd consider some options.

Just over a decade on from the Global Financial crisis the current economic situation could hardly be more serious.

With the world facing the twin challenges of a global pandemic and the threat of a 1929-style market crash, analysts and investors are considering how best to adapt to such threats and what goods and sectors might be best placed to ride out the storm.

While products such as alcohol, tobacco and consumer staples have fared well in some previous recessions, every downturn is different. The current pandemic presents its own unique features, not least the need for scrupulous personal hygiene, ‘social distancing’ and increased home working to avoid spread of the contagion.

Commenting on this and the impact of likely sales of alcohol and tobacco in this environment, Newton Investment portfolio manager Paul Flood says: “Alcohol is generally fairly robust under a recession, however, with many locked in their homes there is a significant amount of trade from pubs and restaurants that will be lost and it is questionable how much of this will be replaced with consumption at home. However, this is likely to be a short term impact to volumes, which should pick back up again once consumers return to work, unless it results in a change of behaviour.

Tobacco sales do look likely to hold up reasonably well and could do better than expected with people working from home rather than the office where smoking bans are in place.

As the initial Covid-19 coronavirus outbreak gathered pace, supermarkets in countries such as the UK and US saw an initial surge in bulk and even panic buying of consumer staples and basic hygiene products such as soap and other sanitary products.

Flood believes that while this initial surge will help buoy incomes for consumer goods providers and retailers, the longer term picture may prove healthier for vendors of more specific pandemic related products such as cleaning agents.

Consumer staples will certainly benefit from bulk buying in supermarkets and this should help cash flows in the short term, but this is likely to subside once pantries are full. However, cleaning products are likely to benefit from a change in behaviour that may be more long lasting than the lockdown,” he says.

Mellon senior portfolio manager Leigh Todd also anticipates sustained demand for sanitary products while the Covid-19 crisis continues.

There has been a surge in household cleaning supplies – much more so than during past recessions; hand sanitizers and disinfecting products are in short supply. We believe demand will likely remain high throughout the pandemic,” she says.

Todd also believes the need for social distancing – and the underlying reason for this action – will lead to some nuanced differences during this downturn. Longer-term behavioural changes resulting from the impacts of the Covid-19 crisis – and the lifestyle changes it prompted – may, in turn, hold valuable insights for investors, she adds.

In the future, consumers will likely be more thoughtful, have longer duration to making large purchases and weigh each spend carefully. The current economic weakness being driven by the Covid-19 coronavirus will lead to some behavioural changes that will be ongoing. This could mean fewer meals outside the house, less travel and more time in the home.

This will lead to increased demand in at-home food and beverage, home upgrades and at-home entertainment. In addition, a unique feature of this recovery has been consumers’ desire to make at-home purchases from businesses with flexible delivery options, such as curbside pickup or home delivery. This trend has accelerated the adoption of omni-channel shopping options and could be an ongoing phenomenon as retailers/consumer-facing companies that have been able to satisfy demand have gained customer loyalty.

One area facing an unusually tough hit in the current market is leisure and entertainment. Widespread bans on social gatherings have led to the temporary closure of everyday entertainment centres such as cinemas, casinos and concert venues. Todd believes the current environment presents major opportunities for media companies, other online entertainment providers and the infrastructure providers which support their output.

This downturn is very different from prior scenarios and is having a significant positive impact on home entertainment driven by a near global shutdown of entertainment alternatives including movie theatres, theme parks, restaurants, bars, casinos, etc.,” she says.

The home entertainment landscape is also significantly different today as streaming television and gaming has seen massive growth in the past decade from improvement in technology, better connectivity, faster internet speeds and the necessity for traditional media companies to find alternative sources of revenue due to the shift from cable television subscription or landline telephone connection to alternative internet-based or wireless service.

According to Todd, the “stay-at-home” companies that benefit the greatest in this period include streaming TV and gaming, wireless and broadband cable providers who are benefitting from upgrades from digital subscriber lines (DSL) to cable and higher-priced data plans.

Elsewhere, Todd believes the recent trend towards online ordering and delivery will only accelerate consumer demand for easy access and product delivery in the current pandemic environment and beyond.

Robotics is another area that could lend itself to uses in both the current pandemic crisis and a post Covid-19 consumer world. In March, a coronavirus hospital ward staffed solely by robots opened in Wuhan, China¹ and more widespread use of robots in the everyday handling and delivery of food and consumer goods could soon follow.

Commenting, Todd adds: “Retailers and restaurants will likely accelerate adoption of robotic capabilities to replace human labour in stores, which could reduce longer-term labour costs and also lower the risk of disease spreading within retail settings.

The companies that are capable of implementing the technology necessary to satisfy customers’ demands for easy product delivery and also reduce the human labour needed to replenish and manage the supply chain will be the longer-term winners. Scale will continue to be increasingly important to manage all of the consumers’ expectations in terms of flexible delivery, broad assortments and safety,” she says.

¹NY Post: Coronavirus hospital ward staffed by robots opens in Wuhan to protect medics. March 10, 2020.

Important information:

https://www.bnymellonim.com/outlook/global-disclosure/

MAR000955, GE0128

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