What happens when the party starts back up?

Meanwhile, job losses at some of the country’s largest employers have continued to dominate the headlines, while it has gone unnoticed that many small companies are creating new jobs. Don’t forget we’ve seen the acceleration of many trends in the UK’s flourishing digital economy during Covid-19 (see The “homebody economy” – investing in your digital back yard).

As seasoned investors we are well practiced in avoiding knee-jerk reactions – back in March when the devastating implications of the Covid-19 pandemic were becoming clear we kept faith in our homework.

We felt the crisis would not fundamentally change the investment outlook for many of the strongest companies. Although the outlook may be  uncertain for the near term, a year or even 18 months of disrupted business should not significantly alter their “true” value.

This is because the companies in the best financial position, with strong balance sheets, are able to weather short-term disruption and focus on long-term performance.

In contrast, markets tend to overreact, to both good and bad news. This is precisely why knee-jerk reactions to headlines that encourage us to catastrophise about the future are never advisable.

Long march higher

If Covid-19 has accelerated trends in the digital economy, it has also brought some difficult decisions forward. Casual dining specialist The Restaurant Group (TRG) pointed out in its recent interim results that there has been around a 30% reduction in capacity in this market so far this year, including brands such as Bill’s, Pizza Express, Pizza Hut and its own Chiquito. 

One could argue that given previous rapid capacity growth, events merely accelerated the inevitable for these brands.

In terms of TRG’s other brands, I was reassured when recently peeking through the glass of my local Wagamama to see hundreds of takeaway bags lined up on the tables (one of which was mine) – a small observation of a pivot to takeaways and click and collect.

Meanwhile, the implications of e-commerce adoption racing ahead by years should continue to help fuel demand for light commercial vans. One such van recently arrived outside my house plastered with a “ready for use” depot sign across the windscreen – this drove home how much demand from UK consumers has not gone away during this crisis, only changed in nature.

The global financial crisis (GFC) was as traumatic for many mid-cap companies as Covid-19 is today. At an individual level, just think how your day has changed. For many of us the daily commute has got a lot shorter and the money we used to spend on public transport, a coffee and croissant on the way into the office and a Pret or Leon for lunch has been redirected.

The worst-hit companies have had to adapt very quickly and that pain is not only felt by them but by all the companies that supply them. Rent appears to have become optional as tenants encourage landlords to share the pain.

What does this mean for property values and the financial institutions that lend to them? These events will play out over the months to come.

But it’s important to keep some investment perspective in what feels like an increasingly short-term world. While the recovery following the GFC felt painfully slow, many mid-caps that had genuine competitive advantages emerged stronger. In hindsight, 2007-09 now appears as a minor blip in the long march higher in their share prices.

Huge uncertainties remain for the economy as the Coronavirus Job Retention Scheme comes to an end and the chancellor’s “Winter Economy Plan” kicks in, for instance. However, we suspect the investment impact of Covid-19 to be transitory for many companies – another blip in their share price charts when we look back in five years’ time.

Strong get stronger

In the early stages of the pandemic, we spent much time analysing how much cash companies had and what their survival prospects were. Since lockdown has been eased, activity has recovered well, allowing many companies to consolidate their strong competitive positions.

In the short term a lot will hinge on Covid-19 and the management of a second phase of lockdowns as winter approaches and recent developments underline how fluid the situation remains.

With a cautiously optimistic eye on the UK economy, we’ve continued to work as always, seeking out the best mid-cap companies which are able to thrive. The UK consumer will not be restricted to a party of six forever.