20 Apr 2020
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Normal as we know it is already old news. When we come out of lockdown, life will be different and a new ‘normal’ will emerge. What will the world look like and what kind of investment opportunities will present themselves? It isn’t clear right now but one thing is certain, there will be winners and losers.
What is apparent so far? Over the last five years, disruptors have emerged in the marketplace. Disruptors are fast-moving companies, often start-ups, focused on an innovative technology or processes, in anything from mobile payments to insurance, that have attacked some of the most profitable elements of a sector’s value chains. These companies come into the market with a great business model, operate predominately online, and are cheaper, faster and can provide overall better service, than many established businesses in these fields. With less physical space and a strong online presence, costs are kept to a minimum.
Some of the old-style economy companies are struggling. These companies are capital intensive and tend to have a large physical footprint rather than the lighter, more agile set up of the disruptors. Capital intensive companies have lots of basic costs and require a constant flow of capital meaning that, in a downturn, their needs can’t be reduced. Capital light companies, on the other hand, can adapt much more easily to their environment.
Under lockdown, disruptors have come to the fore. You can’t get to the shops or the bank so online transactions have gone through the roof. What are the wider implications? Big technological companies managing infrastructure will no doubt come out on top but old-style companies are unlikely to thrive in this new world. The disruptor’s genie is very much out of the bottle and this trend will be hugely accelerated.
Funds concentrated in the older style, known as value, have underperformed, with some UK funds experiencing losses in excess of 30% over the first quarter of 2020. US sustainable growth funds, however, skewed towards technology and with a focus on companies that have a competitive advantage, have not experienced such a significant drop. Not surprisingly, Amazon has reached an all-time high, with Microsoft and other technology firms, which were previously losing ground, now making a come-back. Growth has outperformed value to date and is likely to perform particularly well going forward.
Where will the emphasis be in portfolios going forward? Reducing the weightings to older, value style funds may be a strategy. There could be an expectation that quality companies are the way forward. High quality in the sense that they have strong balance sheets and reasonable levels of capital, they generate substantial levels of income, have the capacity to self-fund and are able to invest back into their own company.
The negative impact on some property funds could be substantial as requirements for space drop due to shops going out of business and more people working remotely. Conversely, warehousing space could be a significant area of growth going forward as home deliveries are set to continue their upward trajectory.
Looking forward, some areas of the market will clearly be challenged, such as holiday companies and airlines, but this event has forced a situation where some companies will flourish and new sectors will grow. Spending on pets has been consistently high during this crisis, it’s clear how owning a pet can enhance your life during lockdown and this sector may see significant development in the aftermath. The enforced reset of the coronavirus crisis will bring about a change in attitudes, behaviour and habits and this movement will drive certain businesses forward. We’re living in a way we’ve never experienced before, what’s important to us will change and our path will be irrevocably altered.
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This information is for UK Professional Advisers only and should not be given to retail clients.The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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