Vaccination against Covid-19 – the beginning of the end?

If there’s one thing uniting businesses this year, it’s the shared experience of facing down Covid-19. As the tide of pandemic panic recedes, we will see which have had their business models changed irrevocably and which have managed to adapt and survive. Many businesses have been carried away by the riptide, while others, like hidden gems, have had their recovery potential covered by the sand thrown up by the turbulence.

Take stock, stand back

As contrarians, we stand back and look at the bigger picture: on which parts of the market are investors fixated? Where is the ‘hot’ money going? And conversely, which sectors and stocks are being unfairly ignored?

For years, the ‘growth’ stock theme has been hugely attractive to many investors. The necessity of home working in 2020 lent more support to such companies, particularly in the technology sector, amplifying investors’ appetite for ‘growth’. In contrast, most ‘value’ stocks are, typically, much less exciting, being exposed to real-world economic activity. When the pandemic struck, many such companies withdrew their guidance on future earnings as they were unable to estimate the effects of lockdowns on their business. As a result of this uncertainty, dividend cuts came thick and fast.

However, some businesses have used the fallout from the pandemic as an opportunity to bring about necessary change to their operations. This should allow them to emerge alive from what has been a truly horrendous experience. The broader market isn’t quite sure how to value such companies, and so, in many cases, they remain out of favour and potentially undervalued.

Among those worth a second look is Ambev – it has a dominant share of Brazil’s beer market and a very strong balance sheet. Despite this, its share price has been depressed because of the shift in consumption from premium beer bought in bars to cheaper alternatives consumed at home. We believe that the company’s share price does not reflect the potential for a sustainable recovery, where a return to ‘normality’ sees a reversal, such that greater volumes of more highly priced beer is consumed.

The beginning of the end?

If successful, widespread vaccination could be a real game-changer, reducing the consequences of Covid-19 and thereby restoring at least a form of life as we knew it. Investors’ reaction to the vaccine news has caused a shift away from ‘growth’ to ‘value’. While it’s too early to say if this is merely a short-term reaction, it does show the potential sea change in investor mindset that can reshape the perception of markets overnight.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.