The past 18 months or so have prompted a good deal of rethinking on several fronts, by consumers and asset managers alike, not least the myriad of societal changes with which we have already come to terms. The phenomena being experienced are universal, and therefore of relevance to those investing on a global basis, such as Alex Crooke, Co-Head of Equities, EMEA & Asia Pacific at Janus Henderson and portfolio manager of The Bankers Investment Trust PLC, a global equity fund within the Janus Henderson range of investment trusts.
In the light of recent events, one might be forgiven for thinking that no-one will return to the office full-time, overseas holidays will become a rarity rather than the norm, cinemas will disappear in the face of the relentless advance of digital streaming services, and that the majority of meals will be home-delivered rather than home cooked.
Some – possibly most – of this may turn out to be true… but it’s unlikely, and we should be wary of allowing conjecture to displace reality. Food delivery firm Deliveroo listed on the UK stock exchange at the end of March 2020 in what was the London Stock Exchange’s largest IPO for a decade and fared poorly. Shares in the business had been offered to investors at 390p but closed 14% lower at 284p per share at the end of the first day’s trading, having fallen by as much as 30% initially.
As the table above illustrates, Deliveroo's IPO exhibited the worst opening day performance since the beginning of 2018. In the quest for an explanation, opinions are many and varied. Some attribute it to the company's dual share structure, which gives CEO Will Shu shares with 20 times the voting power of other shareholders. Others claim it was down to regulatory concerns about the employment status, pay and working conditions of Deliveroo's 'gig-working' riders, which prompted a number of the UK's largest asset managers to withdraw from the issue. Fundamentally, however, it may simply have been mispricing. In the eyes of many, perhaps it won't now be home delivery forever.
Nevertheless, the pandemic has undoubtedly transformed the dynamics of global economies substantially and may well be compelling us all to revisit key aspects of how we work, shop, travel, and entertain ourselves – possibly for good. History reveals that necessity has often proved to be the mother of invention: the death of thousands of horses in an 1815 famine led to the creation of the bicycle, whilst the manufacturing assembly line became prevalent after the Spanish flu pandemic. In this piece, we examine each of those four areas in turn – the worlds of working, shopping, travelling and entertainment – in an attempt to take a glimpse into the future and understand how the world might be changing … not beyond all recognition, but sufficiently to force a reappraisal of the investment opportunities, and pitfalls, that may lie ahead.
How we'll work
The pandemic has taken a severe toll on the world's workers. It has destroyed millions of jobs and caused a drop in employment that was 14 times larger than the global financial crisis of 2008, taking the numbers out of work in many countries to levels last seen in the depression of the 1930s. Its enduring legacy, however, may be a better world of work on the basis that it has accelerated positive changes that were already underway whilst also refocussing attention on areas that were ripe for improvement.
Thanks to the rise of remote working, more individuals will have a greater say in when, where and how they earn a living. Prior to the pandemic, estimates suggested that no more than a quarter of all US full-time employees worked from home but, since March 2020, that number has climbed to at least 37%; some estimates suggest the actual figure is closer to 50%. In certain industries, the current number is significantly higher than that: computing, legal, business, education and finance occupations all reported at least 88% of their employees working from home.1 This shift to a 'hybrid' model of work, with some occurring in an office and some at home, is already compelling managers to raise their game, placing greater trust in technology in order to become better communicators rather than relying on subordinates to pick up information by osmosis, as in an office, to get the message across.
For most businesses, the expectation is that a home/office scenario offers compound benefits, the former allowing employees to be more focused, to avoid the lengthy commute and to balance professional and personal life better, whilst the latter becomes a destination for collaboration, innovation, coaching and networking. The transition has unfolded rather better than expected: people are working longer hours but reporting enhanced levels of both job satisfaction and productivity.
A growing body of research sheds light on what post-pandemic working patterns may look like. In one paper, a survey of thousands of Americans indicated that the average employee would like to work from home nearly half the time; employers were somewhat less enthusiastic, but their prognosis – that one working day a week is likely to be spent at home – is nevertheless a significant departure from the current norm. Interestingly, something of a transatlantic divide has opened up, with US employers broadly adopting a less accommodative approach. Take the banking sector for example: JP Morgan Chase and Goldman Sachs summoned all US staff back to the office as early as June, whilst European banks from HSBC to Société Générale are returning more cautiously and adopting a more relaxed attitude to remote working.
'Remote-only' businesses seem set to remain a small minority; therefore, cities will not empty of workers; and firms will not replace full-time employees with lower-cost freelancers across the board, as might be enticing were the workforce to be wholly remote. The ongoing conflation of domestic and office life will have profound and enduring consequences however, with clear implications for certain investment sectors.
Recent research reveals a marked rise in patent applications for 'work from home' technologies, with companies operating in that field set to prosper. Similarly, businesses have endeavoured to control costs and mitigate uncertainty during historic downturns by adopting automation and redesigning work processes. In a survey of 800 senior executives in July 2020, McKinsey reported that two-thirds said they were accelerating investment in automation and artificial intelligence either somewhat or significantly. Firms have digitised many activities 20 to 25 times faster in the first seven months of 2020 than they had previously thought possible. Production figures for robotics in China exceeded pre-pandemic levels by June 2020.2
Research by Microsoft among 30,000 employees across the world found that 70% want flexible working to remain an option and 66% of business decision-makers are contemplating alternative physical spaces more suited to hybrid work, significantly reducing the demand for commercial real estate. Lloyds Banking Group and HSBC, for example, have said that their office space will shrink by 20% and 40%, respectively. Moreover, no crystal ball is required to foresee the implications for the armies of retailers, hospitality providers and other support services which rely in large part for their revenues on a large, stable, and relatively affluent universe of urban workers.
The marked transition in the role of the home – from family sanctuary to multi-functional live/workspace – has catalysed a host of changes in patterns of consumption. Home improvement businesses are enjoying strong growth for example, whilst e-commerce and streaming services, have experienced significant uplifts in demand: indeed, the demand for data itself will likely see a sharp increase as businesses migrate their need for physical space to a need for more digital space. Supporting remote workers through file storage, video-conferencing, and collaborative platforms requires major investment in cloud-based infrastructure for example. Similarly, public bodies will encounter an increased appetite for data with contact tracing technology, early-warning systems and healthcare databases all requiring significant digital footprints.
Considerable disparity is evident between those nations that were early adopters in this area, such as South Korea, and those that remain off the pace: the US, Canada and much of Europe. In short, those segments of the economy correlated with rising demand in digital channels are likely to prove well positioned for the years to come; those less able to adapt will likely be left behind.
The Bankers Investment Trust owns positions in electronics companies Apple and Samsung Electronics which should benefit both from increased usage of technology in the home and data proliferation. The Trust also has a large holding in Microsoft which is a direct beneficiary of this trend through its cloud business as well as a number of high-profile productivity tools such as Office and Teams.
How we'll shop
It was not long after the arrival of the coronavirus before it became clear that certain sectors faced an existential threat, few more so than the traditional 'bricks and mortar' retailers which have been serving consumers in person for decades, and in some cases centuries. It is somewhat unsurprising, given the UK's status as the most mature e-commerce market in Europe; it's a story which long predates the pandemic and one which has been hastened, not catalysed, by lockdowns.
John Lewis can safely be regarded as emblematic of the sector. In March 2021, it reported the first loss in its history. In the financial year to January 2008, it had 3.5m square feet of retail space across 26 stores; by 2016, it had grown 40% to 4.9m square feet across 46 stores, going into the pandemic larger still with 50 stores. Of those, eight have since closed with a further eight now under threat. During this period, its online business grew from circa 10% of sales in 2008, to 33% in 2016, and to 40% on the eve of the pandemic.
Recent data from consultancy Springboard confirms that visitor numbers to UK retail destinations are substantially depressed: in the four weeks to the end of May 2021, they were 27% below 2019 levels, although the pattern of out-of-town retail parks outperforming continued, with the visitor decline closer to 6% as opposed to a drop in 36% for high street traffic. Whilst coronavirus cases have surged and declined over the past 18 months, the pile of rent that has gone unpaid thanks to government mandated closures has continued to grow, currently standing at £6.4bn according to Remit Consulting.
The extent to which employees return to office work after the eventual full easing of restrictions will be an important driver of footfall in the coming months, although few anticipate that the shift to online will be fully reversed. Predictions of a retail apocalypse may well be overstated of course – although the collapse of the once-mighty retail giant Arcadia has served to fuel that particular fire – and old habits die hard. Nevertheless, the eye-watering valuations of tech-driven e-tailers would seem to suggest that the online revolution will persist long after COVID-19 remains a daily concern.
An obvious development is the hybrid concept of 'click-and-collect'. Prior to the pandemic, it accounted for roughly a third of transaction volumes, with non-grocery items representing the lion's share. Other physical retailers have begun to embrace the model however, increasingly conscious of the fact that the final mile of a package's journey is the most costly and the most problematic. For evidence, look no further than the banks of Amazon lockers at your local railway station, supermarket or mixed-use site, a clear indication of growing symbiosis in the e-commerce space.
Clear beneficiaries of the disruption have been the revitalised grocery retailers, a sector historically seen as low growth, low margin, capital intensive and competitive. However, new management teams, years of restructuring and a scaling up of their online offerings have put the big players back on their feet and, for the first time in a decade, the threat of the discounters – primarily Aldi and Lidl – has been countered. Moreover, calculations by Atrato Capital show that the significant uplift in online order volumes during the pandemic has transformed the profitability of home delivery: for almost two decades, it has been dilutive to the big supermarkets' profits, the delivery charges rarely covering the costs of picking and despatch, but it is now estimated to be almost as profitable as in-store shopping.
Vesa, the investment vehicle of Czech billionaire Daniel Kretinsky, doubled its stake in Sainsbury's to 9.9% in April, becoming the retailer's largest shareholder; Asda was acquired by private equity firm TDR and the petrol-station billionaire Issa brothers in February; and Morrisons accepted the £7 billion takeover bid by US private equity firm Clayton, Dubilier & Rice in October.
The absence of a daily commute, widespread furloughs, and more time for householders to assess their living arrangements – both now and in a remote-working world of the future – have combined to see home improvement providers prosper also, as discussed earlier. Research undertaken by Aldermore Bank midway through 2020 showed that, even at that point, 38% of adults had undertaken DIY or renovation tasks. The healthy stimulus to DIY sales is evidenced by the likes of Kingfisher – the parent group of B&Q and Screwfix – which has seen like-for-like sales increase substantially, and with online sales to the fore. Its share price is currently up some 290% from its 2020 low.3
It would seem that a nation of shopkeepers faces a long and potentially painful battle to adjust not only to the effects of the pandemic but also to the multitude of challenges that have beset the sector in recent years. However, those businesses that have adapted well to online without abandoning the physical presence that evidence suggests will remain a key element of the consumer experience for years to come, are likely to hold fast.
The Bankers Investment Trust benefits from trends in e-commerce growth via its holding in Amazon, as well as cashless payments businesses Visa, Mastercard and Paypal. The Trust also holds stakes in a number of luxury brands, such as Hermes, ANTA sports and Burberry, which are direct beneficiaries of strengthening consumer balance sheets.
How we'll travel
The suitcase appeared at the end of the 19th century when spending several weeks abroad each year became more common for the wealthy. Cheaper airline fares were the 'game-changer' in terms of democratising international travel but, irrespective of levels of affluence, many of us will have not packed a suitcase for the best part of 18 months, for leisure or business. COVID-19 has ravaged an industry that relies on freedom of movement. International travel stopped almost entirely between March and May 2020, with the United Nations World Tourism Organisation (UNWTO) estimating a shortfall in travel spending 10 times that which followed the global financial crisis.
All parties involved in the fields of leisure or business travel have found themselves adversely affected by the pandemic: airlines, hotel chains, car hire firms, travel agents and restaurants have suffered. When rental car group Hertz filed for bankruptcy in May 2020 – in April alone, turnover was down by 73% – it became the pandemic's highest profile travel-related casualty and portended a great many corporate failures to come. Travel is a resilient industry, but it is facing a downturn like no other.
The trough currently being experienced by the airline industry comes after years of healthy growth. In each 15-year period since 1988, total revenue passenger kilometres (RPKS) doubled, and were expected to continue to do so between 2018 and 2033 according to Airbus, the European half of the duopoly which manufactures the world's largest commercial aircraft. It will be a turbulent ride for airlines however, with signs of a full recovery still scant: only 2.8bn passengers are forecast to fly in 2021. Whilst long-haul flying will be hit particularly hard, all airlines face a bleak short-term future. In a good year, the industry makes an operating profit of circa $50bn; in 2020, losses were estimated to be more than double that figure. For operators keen to attract the business traveller, the long-awaited arrival of reliable video-conferencing services – Zoom, Microsoft Teams, Google Hangouts et al – has made matters worse.
A host of carriers has succumbed – Norwegian Air Shuttle, FlyBe, Virgin Australia, Avianca and Stobart Air amongst others – with smaller operators lacking access to substantial capital finding themselves particularly vulnerable. For IAG, the parent company of British Airways and Iberia, capacity in the second quarter of this year was just over a fifth of that seen for the same period in 2019. It has seen its share price plummet from circa £5 in mid-2018 to less than £2 three years later.4 Two types of carrier are likely to survive: those with sound business models and strong balance sheets – Ryanair in Europe (whose share price has recovered to mid-2018 levels), Southwest in the US and AirAsia, all low-cost operators – and legacy carriers, mostly sustained by government funding. Just as PanAm and TWA are relics of the past, so a number of familiar names may no longer find themselves on the tarmac.
Let's turn our attention to travel of a different kind: the train and the car.
Sir Peter Hendy, chairman of Network Rail which owns and manages the railway's infrastructure, estimates 20% of passenger traffic may not return while Abellio, which runs franchises including Greater Anglia and East Midlands Railway, has suggested that the drop-off will be closer to a quarter. At the low point, passenger numbers fell to 5% of pre-pandemic levels; it has climbed since but has not consistently exceeded 40%. Just 12% of commuters are planning to travel five days a week after the pandemic.
Whilst rail operators are drawing up plans for flexible season tickets, industry figures believe that the Treasury, which has pumped over £10bn into keeping the railways running during the past year, is resisting more sweeping reforms. Even before COVID-19, the regular commute was in gradual decline due to flexible working. Petrol has effectively been poured onto what was already a burning platform, with the franchise model set to disappear, replaced by a fixed fee for running services, thereby reducing the risk of fluctuating passenger numbers. There is even talk of prioritising the needs of leisure rail-travellers, who have long been subjected to delays and reduced services as a result of regular weekend engineering works.
Turning to cars, in the 1980s and 1990s, the likes of General Motors (GM) and Toyota boasted some of the world's largest market capitalisations; the picture looks rather different today. Of the four most valuable corporations in the business of moving people around, only two – Toyota and Volkswagen – are traditional carmakers. Tesla, the industry's prime disruptor, is ahead of everyone else by a country mile and completing the universe of four are Uber, the app-based ride-hailing giant now valued at over $100bn.
Having been slow to the electrification party, established carmakers are catching up but are also finding themselves having to confront a new societal challenge: the transition from ownership to 'usership'. The private car will remain a significant element of the new ecosystem – for every 10 miles travelled, Americans drive eight, Europeans seven and the Chinese six – but its dominance may well be under threat as we begin to rethink the concept of mobility … and it's in city centres where the revolution begins. Uber and Lyft, its smaller US rival, have lost money for years but are forecast to become profitable in 2022 according to Morgan Stanley. Zipcar lets people rent vehicles by the hour. Turo, a Californian business, offers peer-to-peer car-sharing. BlaBlaCar, a French firm that connects car drivers with spare seats with passengers looking to travel in the same direction, has succeeded in generating 90m members in 22 countries. Bike-sharing schemes and e-scooters for hire are now commonplace in urban areas. As an additional layer of mobility, specialist journey-planning apps – Whim of Finland and Germany's Deutsche Bahn are good examples – are now able to stitch these various options together to build a seamless trip, charging the individual service providers a commission. Subscription services, where a fixed monthly fee covers all costs other than fuel, are also growing in popularity.
Unsurprisingly, the world's mainstream carmakers are keen to get a piece of this new action: in 2016, GM invested $500m into Lyft, Volkswagen has invested $300m into Gett, a European taxi-hailing app, and Toyota has invested in Uber and Grab, a Singaporean ride-hailing app.
The Bankers Investment Trust owns positions in Toyota Motor. The motor company has joined the electrification race and plans to spend $9 billion over the next decade to build factories for electric-car batteries. The US sleeve also owns a position in American Express. The eventual recovery in global travel should benefit the financial services company. In Asia, another beneficiary of the return of international travel is likely to be the Trust's holding in duty-free business China Tourism.
How we'll entertain ourselves
UK household balance sheets have rarely been healthier, the government having absorbed considerably more of the economic pain of the pandemic than in a normal downturn through the furlough scheme, tax concessions and soft loans. Despite 2020's double-digit fall in GDP, unemployment never rose above 5%. Business insolvencies were lower than in 2019. The household savings ratio – the percentage of disposable income that people save rather than spend – climbed to its highest level on record (see chart below)5, with circa £180bn added to personal bank accounts between the start of the pandemic and the end of June 2021.
The shape of the economic recovery is therefore to a large extent dependent on what consumers choose to do with these untold riches, and to what extent. Andy Haldane, the Bank of England's chief economist, talks about a "coiled spring" of pent-up demand waiting to be released as the government's lockdown shackles continue to be relaxed. Healthier savings should result in higher levels of consumption, on the basis that people will feel less compelled to set aside an overly prudent proportion of their future earnings.
Households are unlikely to remedy missed trips to the hairdressers in 2020 by visiting their stylists more frequently, but they are widely expected to visit the pub and eat out at restaurants more often, particularly as, since 17th May, they have been able to do so inside. It's not a secret that we like a drink in these islands. Analysis from Nielsen Scantrack shows that, whilst sales of supermarket alcohol went sky high during the initial lockdown (the 17 weeks to 11 July 2020), the overall volume of alcohol purchased was lower than in 2019. Perhaps, for us Brits, the social aspect of drinking is as important as the boozing itself! However, supply rather than demand may prove to be the prevailing issue, given that the British Beer & Pub Association, an influential trade body, predicts that some 30,000 pubs – 80% of those in England – are at risk of closing as certain lockdown constraints persist. Food delivery apps have, needless to say, been one of the success stories of the pandemic – the merger of the Just Eat and Takeaway businesses is now valued at over £6bn – but it remains to be seen to what extent our enthusiasm for 'at home' dining remains undimmed.
Other sectors likely to see a marked and sustained uplift in sales are consumer durables – car sales were extremely weak throughout most of 2020 for example – home entertainment technology, equipment which facilitates home working and streaming entertainment services: Netflix, Disney et al. As people seek to reward themselves after months of lockdown containment and enforced saving, increased consumer spending on personal and luxury products is also widely anticipated.
The Bankers Investment Trust owns positions in tech-enabled media companies Netflix (online streaming), Facebook (social media) and Alphabet (YouTube) which have all seen substantial growth in their userbase and revenue over the last few years.
A time to be nimble
Some of the societal and consumer behaviours we've described are hard-wired, of course, and so we may well see a good degree of bounce-back as economies across the world continue to re-open. People like working together, for example, and so offices are unlikely to be redundant, although we will probably need less space. Home delivery is useful, but many would prefer to sit in a restaurant with friends, and so we should see bricks and mortar dining return over the coming year. A great many businesses have disappeared needless to say, particularly in saturated sectors, and so the silver lining to a particularly dark cloud is that competition will have lessened for the survivors.
It's ironic to note that Bankers Investment Trust – one of the UK’s oldest listed vehicles – has remained consistently fleet of foot in adapting the portfolio allocation to prevailing market conditions. Performance has been consistently impressive. Over the longer term, the share price and NAV total return are both well ahead of the benchmark over five and 10 years.6 Over the most recent financial year, with dividends reinvested, the net asset value (NAV) total return was 5.3%, outperforming the FTSE World Index total return of 4.3%, whilst the share price total return was higher still, at 8.1%, due to the narrowing of the discount to NAV at which the shares are traded: a premium of 0.4% at the year-end compared to a discount of 2.2% for the previous financial year.7
There is, of course, an ever-present threat that robust growth prospects and all this new-found demand generate inflation, pushing up bond yields and prompting central banks to be less accommodative with regard to monetary policy. Binges and hangovers do, after all, tend to go together. Despite that, the Organisation for Economic Co-operation and Development (OECD) is predicting that, of the G20 nations, only six will have restored per capita GDP to pre-pandemic levels by the end of 2021. The UK is forecast to achieve that goal in mid-2022.8 Our current economic summer may well prove to resemble our summers in general therefore: pleasant, warm, and fun but with low risk of overheating.
|Discrete year performance % change (updated quarterly)||Share Price||Nav|
|30/06/2020 to 30/06/2021||17.3||20.4|
|28/06/2019 to 30/06/2020||8.3||6.2|
|29/06/2018 to 28/06/2019||9.7||8.9|
|30/06/2017 to 29/06/2018||13.9||10.6|
|30/06/2016 to 30/06/2017||35.3||29.1|
|All performance, cumulative growth and annual growth data is sourced from Morningstar|
1 Source: “How Many Jobs Can be Done at Home?”, Jonathan I Dingel and Brent Neiman, Becker Friedman Institute, June 2020
2 Source: McKinsey, The future of work after COVID-19, 18.02.21
3 Source: Bloomberg, 20.03.20 to 16.08.21
4 Source: Bloomberg, 21.06.18 to 18.06.21
5 Source, Refinitiv Datastream/Fathom Consulting as of July 2021
6 Source: Janus Henderson, The Bankers Investment Trust PLC factsheet, as at 30.06.21
7 Source: Janus Henderson factsheet, The Bankers Investment Trust PLC annual report, 2020
8 Source: OECD Economic Outlook, May 2021