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Market briefing – 15th July 2020
Uncertainty over the impact of Covid-19 remains as prevalent as ever. Opinions on the likely longevity and path of this virus vary enormously. As do views on how it will continue to affect the market. There is a sense that even if the global profile of the virus could be mapped with perfect foresight, predictions surrounding about its impact would still be speculative at best. As a result, market and investment professionals are taking a cautious and measured approach, resulting in the focus being on longer-term opportunities in line with their more strategic investment objectives.
However, the pandemic has created a number of opportunities to invest in companies that have a bias to quality names. Within equities (shares), fund managers are favouring businesses with strong balance sheets, low debt levels and repeatable earnings (profit). Fund managers are tending to focus on long-term themes, in line with their investment horizons and are trying to identify the trends that will drive growth over the next 10 to 20 years.
Businesses that have performed strongly during the coronavirus pandemic are at the forefront of these trends. Additionally, this crisis has led to a structural shift in their favour and raised awareness of them. These include technology companies benefitting from a more digital world and workplace; healthcare businesses which serve an ageing population; and electronic payment services firms reaping the rewards from the growth in e-commerce. As a result, many managers are putting together specific baskets of stocks aimed at tapping into these themes.(1)
‘Too good to be true’
Falling share prices can offer opportunities. This is where the idea of value investing(2) comes from – that is picking shares that trade on a valuation that doesn’t reflect what the shares are really worth (intrinsic or book value). Holding onto these shares can see an investor benefit over the long term. Even the legendary value investor Warren Buffett hasn’t got it right every time, so finding good quality cheaper valued shares can be difficult. Often, when a share price falls sharply, investors jump to try and catch what they view to be a bargain. But they should exercise caution; there’s a big difference between a rock bottom price and good value. Why?
This is where an investment concept known as momentum comes in. Momentum investing involves a strategy to capitalise on the continuance of an existing market trend. Momentum investing holds that trends can persist for some time, and it’s possible to profit by staying with a trend until its conclusion, no matter how long that may be (3). Although it is essential to always remember that past performance is absolutely no guide to future returns, investing history has shown that on average companies that have done well and outperformed the market are more likely to continue to thrive. At the same time those that have struggled tend to continue to underperform. But please remember that all investments carry an element of risk, and it’s important to remember that share prices can fall as well as rise, and you could get back less than you invest.
Intu – past performance really is no guide to future returns
There have been some recent high-profile examples of why trying to catch a falling share price can be a dangerous strategy without the necessary expertise and research capability. While it is sometimes impossible to know if a company is going to fail, and there’s always an element of hindsight bias in these situations, there are lessons to be learned from recent downfalls. For example, buying property below its book value is historically a classic value investing technique. Get it right and the profits can be huge. Get it wrong, everything could be lost. One such example is Intu Properties.
The company, whose centres include Lakeside in Essex, the Trafford Centre in Manchester and Gateshead’s Metrocentre, has debts of more than £4.6bn and was unable to persuade lenders to grant a standstill on debt repayments. Employing nearly 2,400 people and owning 17 shopping centres across the UK, its failure is one of the biggest ever seen, in a property industry battered by the lockdown which has left retail and hospitality tenants unable to pay their rent(4). According to their latest accounts on 31st December 2019, the company showed a net asset value of £1.9bn, i.e. the difference between the value of the firm’s properties (£6.5bn) and its debts (£4.6bn)(5).
(6)https://www.intugroup.co.uk/en/investors/share-price/
However, towards the end of June, the company said it was preparing for administration, should talks with key stakeholders on a debt payment standstill fail. It shares fell 60% to 1.6p capping a rapid fall from grace since its relegation from the ranks of the FTSE 100 back in 2017(7).
Intu had been under pressure before the pandemic. The value of its centres, as well as those of rivals, had been falling as some of the high street’s big occupiers (House of Fraser, Debenhams, John Lewis, etc.) have demanded rent cuts and closed stores, so that they could stay in business. The shift to online shopping was undermining the economics of a physical store before Covid-19; the lockdown has accelerated this threat. Whereas retail property used to be considered a safe bet for investment, with many pension funds investing in this asset type, the declining value and liquidity of property funds investing in companies such as Intu will hit their portfolios.
What should this tell you?
A low share price doesn’t always signal good value. It’s important to understand the difference and take stock of what’s going on with a company when the share price dives, even if it was once seen as a market favourite. More broadly, investors should continue to keep calm and diversify, not only across different asset types (i.e. bonds as well as equities, etc.) but also investment styles (i.e. active management and passive investing) and across different investment philosophies (i.e. growth and value). While individual stock markets will continue to go up and down, smart diversification across assets, styles and philosophies can help investors minimise their risks.
Although it does not guarantee against loss, smart diversification is the most important component of reaching long-range financial goals while minimising risk.
However, remember that no matter how diversified a portfolio is across asset types, investment styles and philosophies, risk and reward do typically go hand in hand and as such risk can never be eliminated completely.
It is true that the short-term horizons and focus discussed enhance the uncertainty due to the unpredictability of this current situation. However, it is important to remember that we very often have a long-term investment time horizon.
As we have said before, we will continue to monitor the current financial situation and keep you notified of any changes that are made. Please seek professional financial advice if you wish to discuss your financial situation further.
Sources
(1) Based on information supplied by Square Mile Investment Consulting and Research Limited.
(2) Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. Value investors use financial analysis, don’t follow the herd, and are long-term investors of quality companies – https://www.investopedia.com/terms/v/valueinvesting.asp
(3) https://www.investopedia.com/terms/m/momentum_investing.asp
(5) https://www.fool.co.uk/investing/2020/06/05/the-intu-share-price-is-up-200-heres-what-id-do-now/
(6) https://www.intugroup.co.uk/en/investors/share-price/
(7) https://www.sharesmagazine.co.uk/news/shares/intu-on-borrowed-time-with-administrators-poised
This publication is marketing material. It is for information purposes only. This statement is for the sole use of the recipient to whom it has been directly delivered by their Foster Denovo Partner and should not be reproduced, copied or made available to others. The information presented herein is for illustrative purposes only and does not provide sufficient information on which to make an informed investment decision. This document is not intended and should not be construed as an offer, solicitation or recommendation to buy or sell any specific investments or participate in any investment (or other) strategy. Potential investors will have sought advice concerning the suitability of any investment from their Foster Denovo Partner. Potential investors should be aware that past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and they may not receive back the amount they originally invested. The tax treatment of investments depends on each investor’s individual circumstances and is subject to changes in tax legislation.
