Louise Kernohan, UK Equities Investment Director at Aberdeen Standard Investments, considers the opportunities in UK equity markets which could reward patient, long-term investors who can look beyond the pandemic.
The coronavirus pandemic has undoubtedly caused considerable upheaval across financial markets over recent months – the UK being no exception. But that shouldn’t detract from areas of the market where there’s still potential for long-term growth, and where investors should look beyond short-term falls in share prices and dividend payments.
Focus on quality and fundamentals
Our investment process for our core UK equity portfolios involves going back to basics and focussing on company fundamentals – in other words, businesses which have a strong management structure and show good and ongoing earnings potential. Robust cashflows and balance sheets are also an important consideration as these can provide downside protection when times are tough.
The pandemic has brought into sharp focus the importance of the robust environmental, social and governance (ESG) approach that’s at the heart of our investment process. This allows us to properly understand the risks and opportunities of companies we’re considering investing in, and whether they’ll be able to provide long-term and sustainable growth. In turn, this helps ensure that we identify high-quality, resilient companies to include in our portfolios that can thrive and flourish regardless of economic and market conditions.
We’re also very hands-on when it comes to the companies we invest in or are considering investing in. Meeting management teams and decision-makers often gives us insights that other market participants might not have. It also mean we can offer investee companies the full extent of our ESG expertise, helping them improve and potentially become better and even more sustainable businesses.
Our research and ESG approach covers all areas of UK markets – from the large caps of the FTSE® 100 to mid-caps to the Alternative Investment Market. Even if we don’t hold a stock within one of our portfolios, we’ve researched it. This gives us an enviable pool of stocks to consider.
Focus on key consumer and business trends
When we’re considering which companies meet our key criteria of quality and resilience, we also look at how well positioned they are to take advantage of key consumer and business trends. Here are a few trends where we see some great opportunities in the UK equities universe.
We also look at how well positioned they are to take advantage of key consumer and business trends.
1. Premiumisation
Over recent years, consumers have shown more inclination to be selective about what they spend their money on, and choose quality over quantity. Luxury brands have benefited from this trend, but so too have businesses which offer affordable luxuries. And that’s where we see the best opportunities. Even if there’s a temporary dip in people’s disposable income as a result of the current crisis, they’re more likely to spend their money on small luxuries than big statement purchases.
The drinks industry is a good example of this trend in practice. There’s been a substantial increase in the number of premium drinks and mixers on the market, and one of the companies which we invest in has seen considerable growth in its market share over recent years compared with its rivals. It’s also a company with a good, engaged workforce, which is willing to work with its investors to manage its ESG risks to make sure that it can continue to grow sustainably.
2. Online retailing
The current crisis has only served to exacerbate the problems facing many high street retailers. In recent months, we’ve seen a number of big-name retailers who have been stalwarts of UK high streets for many years go out of business, and more will undoubtedly follow.
We’ve been aware of the issues facing high street retailers for a while. And with online shoppers spending significantly more than in-store customers, we’ve concentrated on retailers who have multi-channel or online-only business models. One such retailer is a pet care provider. Pet care has been a growth area in recent years, with absolute spend per pet increasing. Even when times are tough, people are reluctant to cut down on this spending, so sales are relatively resilient.
This particular business has a growing online and repeat subscription proposition, as well as a complementary vet business. All of this has helped them become a one-stop provider and bring in more customers, which in turn means that their earnings are potentially more resilient than those of their competitors.
3. Technology
Technology is obviously now ingrained in everyone’s life and in all businesses. Businesses in particular need long-term technology partners that can integrate seamlessly and help them deliver their products and services.
In this area, we look for opportunities in technology companies which really understand the businesses they work with and, which like us, want to support their business partners in our ever-changing world to create long-term growth.
A company which we include in several of our UK equity portfolios provides industrial software that helps its customers manage their businesses more safely, efficiently and cost effectively. Because this software becomes deeply embedded in its customers’ workflows, not only does the company have the potential to benefit from the structural trend of increased digitisation, it’s also more likely to be resilient in downturns.
4. Healthcare and medical research
Healthcare and medical research have of course been hitting the headlines during the pandemic, particularly in the search for a vaccine against Covid-19. But they’re areas where there will always be opportunities given the ongoing essential need to support health and wellbeing.
Opportunities aren’t limited to companies directly involved in these areas though. We also consider healthcare and medical research suppliers, as well as companies involved in wider scientific research.
Final thoughts
Understandably there’s concern about the economic outlook for the UK because of the pandemic and ongoing Brexit trade talks. However, this shouldn’t detract from the fact that there are high-quality UK companies of all sizes, with sustainable business models, which have the potential to reward patient, long-term investors.
We believe in working with these companies to help them achieve their ambitions and provide the sustainable long-term returns that investors need. In our view, having a long-term view is vital. While current economic and corporate environments are uncertain, and could cause further falls in share prices, investors should feel confident about the long-term prospects of structurally sound companies.