Who will fly (and who will not) after the pandemic

Now it's your turn: this, in essence, is the message that Christine Lagarde, president of the European Central Bank, sent on Thursday 4 illustrating the expansion of the Pandemic Emergency Purchase Program (PEPP). The ECB, she hinted, has done its part but from a certain point onwards economies and financial markets will have to do it themselves. This also seems to be the orientation in the United States where the Federal Reserve has ensured that it will provide infinite liquidity but which, since last week, has been doing so (imperceptibly) in decreasing measure.

Central banks, therefore, confirm their commitment to support economies (and the work of governments which, finally, seems aligned), but there are no certainties of automatic additional interventions on the horizon. So far, it must be recognized, the reaction of central banks and governments has been prompt and incisive, certainly less confused and uneven than that which occurred between 2008 and 2012, perhaps because many of today's actors had experienced the crises of those years. Some guidelines have also treasured the lessons of history: businesses, for example, have not been asked to avoid layoffs as happened in 1929 with catastrophic consequences. The impact force of a financial crisis far greater than that of 2008 was thus reduced to a minimum.

Between the third week of March and the first of June, the financial markets of the main economies recorded a substantial rally after losing 35% from the February peak with the most rapid reversal in history (and a subsequent three times greater Fed interview to that done in six months in 2008).

The rally of these days discounts that everything goes back to the way it was before, at least 80-90%, although the number of infected people in the world is still increasing there is no evidence that the virus has been eradicated and that the end of the lockdown does not lead to a new wave of contagions. And, above all, assuming that each company returns back to the same sales immediately and with the same profit margins. Some observers have rightly pointed out that the real economy is like a nuclear power plant: the controlled chain reaction that creates energy can be interrupted but there is no absolute certainty that the activity can resume simply by pressing a switch.

A first interesting test on the health of companies will be the publication of the second-quarter results in July. It will be clear who with the crisis has seized the opportunity to improve their position, who has suffered but will see market share grow, who has pulled out and who will present themselves in a new guise, after a profound crisis, to face (a new) tomorrow.

If you consider it in terms of investment strategy, this classification is difficult to manage through investment instruments that passively replicate the indices (ETF), especially those that invest in Europe because they are focused on the main indices and not on specific topics let alone those related to the management of the post-pandemic. Careful and continuous active management will make the difference. Smart investors are pulling the names of active managers out of the drawer and preparing to put passive management into the attic.

Which are the companies with the best prospects or, to use the metaphor of flight, those that will fly safely from here to the half-yearly report and beyond? We divided them into four categories, giving each category a name that expresses its qualities.

1) Icarus. This is the category of companies operating in the sectors benefited by the pandemic (pharmaceutical, video games, e-commerce, video conferencing systems, electronic payment systems). They are a bit like Icarus: they flew so high that they risk burning their wings. For many, the season has been so brilliant that managers and shareholders still struggle to believe their eyes. Any sign of pandemic risk reduction is potentially a negative for these companies and it is almost accidental that some contributed to the recent rally.

2) Eagles. These are the companies with a business model suitable for the post-Covid-19 world, who in recent months have worked tirelessly in the shadows to increase market share, have easily obtained financing from the market and are pawing to get back to the maximum. Our preference goes to these companies, even if they are still not very appreciated by the market. The variable that puts them in a category of their own is the quality of management: intelligent, flexible, open-minded, credible. As for the business model and offer, these companies are both disruptive, in that they take advantage of the break caused by the crisis to make a qualitative leap both traditional but in continuous expansion, also for external lines.

3) Pigeons. The least interesting category, probably the most overestimated, is that of the so-called industrial-cyclicals. It is a vast category (in the United States, many are found in the S&P index), which includes various economic sectors and in which it is difficult to distinguish excellent companies from mediocre ones. Many are overly indebted, have made too many buybacks in the last ten years to the detriment of the capex, may have benefited from the market rebound from the lows of March 23 but are likely to fly with difficulty from one target to another due to the inability to question their culture.

4) Swans. These are the companies that are struggling to take off today but could fly very well. Airlines, for example, involved in a complex match between State aid, the conquest of market share and the transformation of operations that will produce interesting developments.

A category to be considered separately is that of the FAANG (Facebook, Amazon, Apple, Netflix, Google). In recent years, the markets have certified their success and even in the pandemic crisis, they have fared very well. For them, the real match is European business taxation: it is entering the heart and threatening to intensify relations between the United States and Europe as well as reducing profits.

Leaving market considerations for a moment, the attempt by the American administration to impose on the Chinese companies listed on Wall Street the communication of the same information requested to the American ones is to be welcomed. At the moment, Chinese companies benefit from some exemptions and end up being passively included in some major indices (such as, for example, MSCI) which give them a sort of "quality certification" on a non-verifiable basis. There is a strong movement in the United States to cover this regulatory gap. More than inspired by the principle of market transparency, the initiative of the American administration is to be seen in the ongoing war with the Chinese. But what matters is the goal. And on the greater transparency, we can only agree.

Let's close with Simplify 02. We are continuing the strategy of allocating risk where there is value and we expect markets to soon reward this approach. It is a strategy geared primarily to protect capital and then to increase it in absolute terms. Since the beginning of 2020, the fund's performance has not only been positive but has avoided putting capital at risk in the most alarming moments. Please contact us directly for further material on the management style.

Best regards

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