The long-term trends we’re backing in spite of COVID-19

We believe the COVID-19 crisis will impact companies in vastly different ways, and our way through is to continue identifying and acting on long-term structural trends which are more resilient to economic cycles.

The state of play

Notwithstanding breathtakingly large and rapid fiscal and monetary responses from governments and central banks across the world, we believe COVID-19 will materially alter the path of near-term economic growth and corporate performance, through causes such as major supply chain disruptions, an unprecedented contraction in business and consumer demand, and substantially diminished confidence levels.

Whilst we have no doubt that meaningful economic and central bank policy will aid the eventual recovery, the timing of a recovery in demand remains uncertain and dependent upon suitable vaccines at one extreme, or herd immunity and a movement from suppression to mitigation strategies at the other. The former could take over a year whilst the latter could see workers return to work much sooner with appropriate testing.

Different companies, different outcomes

At this stage, we believe that it remains uncertain if markets have found a bottom, and short-term outlooks are unclear. In our view, a vast majority of companies will struggle to create value and achieve an economic profit, even with essential policy support. Yet, as with all economic downturns, the impact will not be borne equally across companies. Some companies will fare much better than others, whilst some will wither on the vine.

A sustainable financial position, strong profitability, durable competitive advantage, less cyclical demand and sound long-term growth prospects are critical requirements for companies to not only survive, but indeed thrive in the challenges ahead and to capitalise on the recovery when it arrives. These are the exact characteristics we seek to capture as part of our investment strategy.

In our view, the mid to long-term structural trends that support the companies we invest in remain strong and unchallenged, as does the less discretionary nature of the products and services that our companies typically provide. While many of the second and third order impacts relating to the pandemic remain hard to predict, we believe that COVID-19 will serve to accelerate or reinforce many of these structural changes and profit pool shifts that were already underway. Some of the most pertinent trends which we could benefit from include:

• Offline retail to ecommerce. 
• Remote work and digital economy. 
• Productivity and innovation in the healthcare system - smarter ‘everything’ (infrastructure, buildings, homes, safety, energy, mobility.)
• Software-centric and cloud-hosted IT spending (versus hardware centric and on premise.)
• Transition from cash-based to electronic payment technologies.
• The increasing investment in highly targeted biologics (large complex molecules drugs) at the expense of small molecule drug development.
• Factory automation.

Many of these were profiled in our recent white paper focusing on structural trends in the decade ahead – available to download here.

We absolutely acknowledge that uncertainty is high. However, we remain opportunistic around committing capital to new or existing strong investment ideas. In line with our philosophy and process, we believe company fundamentals and the ability to efficiently diversify our cash flow exposures will be the determinant of success in the long run.