Growth vs value: how much are you willing to pay?
On the whole, I don’t think lockdown has been too difficult for us – and it’s certainly been...
As we await more details from the government on how lockdown will be eased, some areas of the economy have already started returning to work – albeit with some strict social distancing rules in place.
For example, in the much beleaguered retail sector, DIY chain B&Q has how opened up its stores, whilst in the construction industry housebuilders like Taylor Wimpey have resumed operations. Some infrastructure projects like construction work on the HS2 rail link have also been given the green light to commence.
From an investment point of view, does that make these ‘early-start’ sectors more attractive? We take a look at the three areas in more detail.
The retail sector has been under extreme stress for some time with the traditional high street struggling to survive even before the crisis and companies like Debenhams, Oasis and Warehouse have fallen into administration in recent weeks.
Ryan Lightfoot-Brown, senior research analyst at FundCalibre, said: “It is almost impossible to make a viable case for building a new shopping area now.
“Couple this with more stress in the restaurant and entertainment space due to the crisis – both areas that retail sector has tried to push through ‘destination centres’ like Westfield where consumers can eat, shop, and go bowling etc – and you have a gloomy outlook: no leisure company is going to be in a place to expand, other than maybe merging or buying out collapsed peers.
“I think it will take some time before people are comfortable socialising in crowded places, even when they are told it is allowed.
“Covid-19 has also rapidly accelerated the existing trend of moving from physical sales to online. Amazon is an obvious winner and that is reflected in its share price, which is trading close to all-time highs and well above where it was before the crisis.”
Funds that could benefit from this accelerated trend towards online shopping and perhaps more home entertainment include Smith & Williamson Artificial Intelligence – which holds the likes of Ocado, Netflix and Activision Blizzard, the video gaming company.
Also, Marlborough Multi-Cap Growth, whose manager was keen on this theme before the crisis. He sees e-commerce and the move away from bricks and mortar as a very strong and powerful trend that’s going to continue for many years and holds the likes of online fashion retailer Boohoo, for example.
House builders are potentially vulnerable, according to James Yardley, senior research analyst at FundCalibre. “They have very high levels of operational gearing, which means a small change in house prices can have a big impact on their bottom line. Not only have their building operations been disrupted or stopped completely by the virus, but what they are building could sell for a lot less: people losing their jobs can result in missed mortgage payments, forced selling of homes and then lower house prices.
“That said, these companies generally have strong balance sheets and are in a much stronger financial position than they were in 2008. Very low interest rates are also good for housebuilders and there is still a structural shortage of housing in this country. Therefore, the longer-term supply and demand dynamics are positive.”
Ninety One UK Special Situations (previously called Investec UK Special Situations and now run by Alessandro Dicorrado and Steve Woolley), would be an option for those that think house builders will come out on top.
The managers hold a number of stocks in this area, having added some in the recent sell-off. For example, holdings include Barrat Developments, Taylor Wimpey, Redrow and Bellway, as well as related businesses such as Howden’s Joinery, Travis Perkins and Grafton Group.
Alessandro told us more about these holdings in his recent podcast
Another fund to consider would be Man GLG Income. Its manager Henry Dixon said recently: “Housebuilders were considerable drags to performance, particularly Redrow and Bellway, with Redrow shares falling 60% during the month [of March] and Bellway 43%.
“Having spoken to a number of the management teams in the sector, we believe that current valuations – at a material discount to tangible asset value – imply a permanent -30% decline in house prices and no offsetting fall in the land price.
“But with no debt, an ability to cut costs down to a minimum as the housing market is closed, significant asset value and government backing, we believe the risk-reward of the positions currently, well-below post Brexit referendum lows, is excellent.”
Investment in infrastructure – such as roads, airports, healthcare and power supply – is usually seen as a safe option for investors in times of recession and also tends to provide a steady stream of income.
But the sector has not been immune from this crisis and has fallen in value (albeit to a lesser extent), along with the rest of the stock market, as airports, ports and roads have come to a standstill.
Andrew Greenup, co-manager of First State Global Listed Infrastructure, said recently: “Airports, railways and toll roads have seen their usage fall dramatically in recent weeks. Strong balance sheets should see these companies come through the crisis, but they are in the eye of the storm today. Energy infrastructure is also bearing the brunt of demand and supply disruption.
“Thankfully, there are some areas of infrastructure holding up a lot better: for example, mobile towers through the increased use of the internet and working from home (internet usage is in fact up some 30%-80% at different times of the day), as well as utilities companies. And of course, some of these essential services are pretty recession-proof, which will bode well for the coming months.”
Will Argent, investment advisor to the VT Gravis UK Infrastructure Income fund, added: “The infrastructure sector gives you long visibility given the contracted cashflow and the critical nature of the underlying assets, putting them in a resilient position in these unique times. Whether its waste water, maintaining schools, utilities or power – all of these social services are being used or maintained during this time of significantly reduced economic activity. That’s why you can have confidence in the cashflow being largely uncorrelated to broader economic conditions.”
Also, the sector is an obvious route for governments to spend their way back to revitalised economic growth – especially when they can borrow the money almost interest -free. Policy in China, the UK and the US (election dependent) are all putting a tailwind behind this sector.