Three investment themes for lockdown

Posted by Liz Rees in Latest insights category on 28 Apr 20


Long-term themes are an integral part of identifying growth opportunities. Some, such as global travel and demand for luxury brands, have been blown off course by the lockdown but are likely to stage at least a partial recovery when restrictions are lifted.

A number of products have seen a temporary uplift, such as baking ingredients, fitness equipment and pet supplies, but are likely to see demand settle back to more normal levels. Even within sectors the picture can be mixed.

Below we look at the key drivers of some themes that have proved resilient, even delivering growth, and how investors might gain exposure.

On-line services

A structural transition from traditional high street to online retailing has been taking place for some time but has accelerated. The ONS* UK retail sales figures revealed that online sales grew by 12.5% in March versus 2% in February as high street shops closed their doors.

As a result, the share of online activity increased from 19.6% to 22.3% of total retail sales. Although footfall should return to the high street, business failures means capacity has been lost. Many expect some demand to shift online permanently, suggesting ecommerce could continue to grow.

Supermarkets have had the best of both worlds of late, with the main constraint being the ability to offer delivery slots. Whilst overall demand is likely to tail off, customers may decide they like the convenience of home delivery and suppliers with infrastructure in place, such as Ocado, may well benefit.

Healthcare

Recent headlines have centred on pharmaceutical majors with existing drugs that may be able to treat Covid-19 or biotechnology firms with new products going through trials. Many will fall by the wayside and attempting to pick winners is difficult, but success could be extremely valuable.

Moreover, the health crisis has highlighted that many healthcare systems have struggled to cope with the pandemic. This has led to allocation of government funds towards essential equipment and treatments but is also likely to mean politicians will prioritise health in future. The trend will be supported by ageing populations in many countries increasing demand for health resources.

This should have a positive impact on the healthcare industry and present opportunities in companies ranging from pharmaceuticals (discovery and delivery of drugs) and diagnostics to builders of hospitals and care facilities. Private health insurers and providers may also benefit.

Technology

To some extent these themes overlap and advances in technology are a common thread that links them. For example, there may be greater use of technology in healthcare, for online consultations and diagnostics, while Ocado provides digital automation for warehousing and distribution of food. 

Technology is a broad church and some companies have seen demand for their products soar, especially in relation to homeworking and entertainment. Notable beneficiaries include Amazon (home delivery), Microsoft (cloud services), Netflix (content streaming), Zoom (video conferencing) and Facebook (social media). 

However, not all are seeing a bonanza. Whilst Apple is benefiting from greater usage of mobiles and associated services, its stores selling new products are closed and the manufacturing supply chain disrupted. Uber, the taxi ride hailing app, has fallen sharply from favour due to restrictions on movement.  

Investing in winners

Fund managers are hunting for the winners while keeping a close eye on valuations. Any companies that fail to deliver on expectations are likely to find their share prices punished.  

The US is a hotbed of technology innovation and Morningstar silver-rated T.Rowe Price US Large Cap Growth Equity has around 30% of its portfolio invested in Microsoft, Amazon, Facebook and Alphabet. Silver-rated Polar Capital Global Technology also holds Chinese technology giants Alibaba and Tencent in its top 10 holdings.

Gold-rated Fundsmith Equity and silver-rated Artemis Global Select both have around a quarter of their funds in healthcare stocks.

*Office for National Statistics