What locking habits could last a lifetime?

“Prediction is very difficult, especially when it comes to the future.” This caveat, attributed to Nobel Prize-winning quantum physicist Niels Bohr, is applicable to anyone who predicts, and especially investors at this point.

Stock markets will continue to be rocked by the daily information flows around the pandemic. However, the success of investing in consumer stocks over the next two years will depend on developing a view of post-pandemic consumption patterns using a clear framework.


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Where lifestyle changes are permanent, extrapolating trends from the past year may well be fruitful. On the other hand, a “mean reversion” might be the right investment approach for companies on their way to rebounding, once restrictions are relaxed and old behaviors might return.

And, of course, it will be crucial to avoid stocks for which the market mistakenly assumes the foreclosure momentum continues long into the future. Here are some observations to help you navigate the likely dramatic swings in the public health and stock market outlook that we may experience in the coming months.

There may not be a clean break from the pandemic

Markets adopted the Pfizer / BioNTech vaccine effectiveness announcement on November 9, 2020, with the sectors and companies that had suffered the most from the lockdowns faring particularly well. Oil jumped 8.5% and concert promoters were up 24% on the day. Airlines around the world have embarked on a two-day 15% rally.

The news from Pfizer / BioNTech, combined with subsequent announcements from other vaccine developers, marked a massive breakthrough for the public health outlook. However, it became clear afterwards that there will be no clean break with the pandemic, no time when we declare victory and go back to the old normal.

The newer variants that reduce the effectiveness of the vaccine are the most obvious obstacle to such a scenario, but there are also issues with the logistics of vaccine deployment and the duration of the immune response (still unknown, for obvious reasons. ).

It is also difficult to imagine a rapid reinstatement of travel between countries (China, Australia, etc.) where Covid-19 has been strongly repressed and those which are in the process of collective immunity.

The scenario that we must imagine is therefore that of a gradual easing of restrictions, with occasional setbacks and significant variations between countries.

Short-term stock price fluctuations can be misleading

Patterns of consumer spending can be quite irregular in response to changes in the environment. In particular, there will likely be a strong pent-up demand for all types of experiments when the restrictions are relaxed.

A travel spike in the summer of 2021 appears highly likely in countries where vaccine deployments have reduced public health risk. This increased demand will respond to reduced capacity and could lead to significant price increases for flights and hotel rooms.

Likewise, if people are allowed to socialize more freely, the hospitality business and all that goes with it (carpooling, alcoholic drinks, etc.) are likely to flourish.

An advance in experimental spending could crowd out spending in other areas and, therefore, the summer months can give the wrong impression of possible consumption patterns after the pandemic. High savings rates in countries like the United States suggest more money to spend overall, but there can still be some misleading moves in the short term.

The market is likely to react to these movements both positively and negatively. Therefore, it is important that investors have a clear view of the long-term direction of spending habits in order to navigate the months ahead.

Understand the factors that lead to the formation of habits

Academic literature suggests that it can take up to 254 days to form a habit. Given that most consumers have struggled with pandemic-related restrictions for at least that long, one might jump to the conclusion that our new routines are here to stay.

However, there is more to habit than just repeating over a long period of time. Psychologists and behavioral experts also speak of a “habit loop”, which has three components: “contextual indication”, the behavior itself and the reward.

As the public health situation normalizes, key elements of the habit loop will be broken: some of the contextual signals forced by the pandemic (home schooling, etc.) will be absent. And, what is important to us, the reward can be obtained more easily through pre-pandemic behaviors.

Much has been written about how the pandemic accelerated pre-existing trends – especially digitization trends like e-commerce, video conferencing, and connected games. Other notable changes include increased interest in health and wellness, scratchy cooking, and investing in people’s homes.

Using the habit framework described above, the changes most likely to be “persistent” are those that provide a reward that cannot be easily replicated once the restrictions are relaxed. The table below presents our views on what this means for some of the megatrends.

Source: Schroders, March 2021.

If investors can properly anticipate what will happen to post-pandemic behavior, it will allow them to create “positive growth gaps” in their forecasts for companies benefiting from these trends. Likewise, they will be able to avoid those where the market wrongly extrapolates ephemeral changes.

These are positive growth differentials that lead to the outperformance of stock prices. If a company performs better than consensus expectations and market values, that company’s share price is likely to outperform.

Changes in the way companies do business can have profound investment implications

The impact of these trends on revenues is obvious. However, the greatest rewards will come from identifying companies that have been able to change the way they do business with a potentially lasting positive impact on profitability and returns.

The sneakers and sportswear sector is a good example. Brand owners have traditionally distributed their products through physical retailers.

These “old retailers” took a significant share of the profits and yet in many cases failed to effectively market the product, although there are some notable exceptions.

For years, brand owners have built their own stores and e-commerce sites, and developed elaborate app “ecosystems” to attract customers from traditional retailers. Although they made steady progress in this regard, it was an expensive endeavor, which held back profitability.

With Covid-19, many customers have found their own way to the websites and apps of brand owners. With the shift to ecommerce platforms likely to be permanent, we expect to see a dramatic shift in terms of profitability and performance.

Sales of running and training equipment could decelerate in 2021 compared to 2020. This is, however, less relevant than the change in the way these companies are now able to do business, or the change in their “business model”. “.

On the other hand, the increased penetration of grocery e-commerce is a headache for traditional food retailers. From their point of view, there is no better business model than having a customer go to the store, choose their own products, place them on the checkout conveyor belt (or better still go by car. box), packs them, then drives them. Reception.

Any change to this model adds work and costs them money in a company where profitability is already in question. This is one of the main reasons many dragged their heels to make e-commerce widely available before the pandemic.

Unfortunately for them, it will be impossible to put the toothpaste back in the tube (so to speak). While some consumers will still prefer to choose their own food (especially fresh foods), the convenience of e-commerce will prove to be a greater reward for most.

Grocers strive to automate the picking process as much as possible, but this requires capital expenditure and a long lead time. They are also trying to take the cost of delivery out of the equation by encouraging “click and collect”, but that will not be the preference of many consumers.

The laws of economics suggest that eventually, incumbents will be able to charge enough to make reasonable returns on e-commerce, but it is ultimately long and in the meantime profitability will be under pressure.

Investors will need to develop a framework to judge the sustainability of the lifestyle changes seen during the pandemic. Then, by modeling their long-term impact on business fundamentals – to identify positive growth gaps – they should make good investments.

Short-term volatility and misleading movements in stock prices lie ahead. However, these should only increase the opportunity for those with a clear vision to buy the right companies at attractive prices, knowing that they are beneficiaries of lasting changes in habits.

All references to regions and / or countries are for reference only.

Charles Somers, Schroders Fund Manager.

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