We’ve witnessed dramatic fiscal and monetary responses to the COVID-19 pandemic by governments across the world. Now we must look at how that stimulus is likely to evolve and consider the longer-term outlook for stock markets in this context.
From an investment perspective, we can broadly view the evolution of the pandemic in three stages:
- Income stimulus
- The reopening
- Infrastructure stimulus
At stage one, as money has been transferred from governments to households, the major beneficiaries have been secular growers that have benefited from a world in lockdown – these are a narrow set of winners.
Stage one beneficiaries in Antipodes’ portfolio include social commerce and software incumbents such Facebook, Microsoft and Alibaba. As well as pharmaceutical stocks such as Merck, Roche and Sanofi. Lowes – which has benefited from increased DIY activity – has also rebounded with strength.
On the margin, however, we are of the opinion that now is the time to begin allocating away from stage one winners to stage two and stage three opportunities.
At stage two (the reopening) we are looking at dislocated category leaders that may come out of the pandemic with less competition.
At this point it is important to remember that in many areas of the market we don’t see the pre-COVID-19 status quo resuming. Businesses have learnt to do things with less – in particular, cost cutting will likely result in slower than expected employment recovery, reductions in business travel and easing office demand.
Strong retail banks and under-the-radar omnichannel retail leaders are among the stage two beneficiaries.
The shift to infrastructure stimulus
The economies that are best able to kick-start real investment will emerge from COVID-19 strongest.
The fact is, income stimulus is simply a transfer payment which can only ever be a short-term measure. Ultimately, governments that have focused on income stimulus, such as the US, will need to pivot towards infrastructure spending to generate meaningful investment to strengthen their economies.
We see infrastructure stimulus as the third stage in the recovery evolution.
At present, China and Europe are ahead in the progression to major infrastructure stimulus with decarbonisation, electric vehicles and 5G adoption at the forefront. The market beneficiaries lie in more economically cyclical businesses, many of them currently trading on historically low multiples.
Three Antipodes’ holdings that are positioned to outperform when stimulus switches from income protection to investment include Siemens, Electricite de France (EDF) and Continental.
As we recently wrote, various signals suggest that tomorrow’s market winners are today’s misunderstood lower multiple stocks. The tailwind of major infrastructure stimulus strengthens the case.
The recovery risks
Investors must keep in mind the downside risks that could potentially derail a broad transition from lockdowns and income stimulus to investment stimulus.
In the US, we are faced with an unpredictable environment when it comes to policy makers. The withdrawal of income stimulus packages ahead of the release of any infrastructure stimulus is a risk that needs to be watched closely.
We are also monitoring the US-China rivalry. Further escalation in tensions could also become a headwind.
Finally, as COVID-19 continues to spread in many parts of the world, we must be mindful of a ‘second wave’ and how that could exacerbate social unrest and populism.
We take a multi-layered approach to risk management. It begins with owning businesses that provide multiple ways of winning. We also look for uncorrelated sources of alpha and use our macro observations to feed into the margin of safety we require to own a stock.
Around the edges, we look for tail risk protection – insurance to protect our portfolios against the unpredictable.
Webinar – Stages and challenges of reopening
This webinar was presented live on 4 June, 2020. To watch the full presentation, click here.