Taking stock: Musings from Munich

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“Nur die Harten kommen in den Garten.”

Old German proverb

The RWC European Equities team attended the Baader Investment Conference last week in Munich. This year’s event took place in a hybrid format, providing the team with an opportunity for a virtual catch up with the management teams of more than thirty German businesses.

Unsurprisingly, there was a significant divergence in tone from different companies. At one extreme, businesses that are benefiting from the amount of time people are spending at home and socially distancing, tended to present an upbeat assessment of their current operations. At the other end of the spectrum were some of the companies which operate in industries that have been existentially threatened by the pandemic.

Within the former group, the team held a series of meetings with online retailers, which naturally saw a meaningful pickup in demand during the first couple of months of lockdown. Many analysts had initially assumed that this accelerated demand would prove to be a temporary phenomenon, but it is becoming increasingly clear that there is an element of longevity to the change in consumer behaviour. For some businesses, these newly acquired customers are proving stickier than expected and many are spending more than longer-standing customers. Rather than bringing a temporary boost to trade, therefore, it now feels like the pandemic has permanently changed the extent of online retail penetration in Europe, delivering several years of growth in a matter of months.

On the other hand, the narrative from practically any business exposed to the travel industry, has clearly been hit extremely hard by the pandemic and very few businesses are seeing meaningful signs of demand returning. This absence of demand is clearly a concern, particularly for businesses which have a significant debt burden or a high degree of fixed costs. To paraphrase the old German proverb above, perhaps only the strongest will survive.

Of course, equity markets have already responded to the dichotomy in operational performance – the Covid winners have traded well, with many share prices moving to new all-time highs over the summer, whereas the share prices of many of the Covid losers continue to languish near the lows that prevailed in March. Care is therefore required when sifting through the opportunity set to ascertain which of the market’s recent winners can sustain their superior performance and which of the perceived losers ultimately have robust recovery prospects.

The healthcare industry has seen its fair share of winners this year, and the team has a number of medical technology positions that have benefited from a step-change in demand as a result of the health crisis. The resounding theme from the team’s conversations with healthcare companies was that a near-term breakthrough in the race for a vaccine is unlikely. The consensus among healthcare professionals is that a vaccine may become available in the spring of next year. But the availability of a vaccine won’t immediately reduce the need for Covid testing, because it will take a long time to roll it out universally. The demand outlook for Europe’s testing and diagnostics businesses, therefore, looks robust for some time to come.

Last week’s highlights

With Europe seemingly on the brink of the introduction of further measures in the fight against the coronavirus, equity markets appear to have returned to some of the themes that performed well during the original lockdown of spring. Our portfolios are positively skewed towards this market dynamic with holdings such as HelloFresh, ASOS, Avast, Teleperformance, Ambu and Domino’s Pizza, all seen as beneficiaries of the current environment.

The team met with Europe’s largest optician, Fielmann, during the Munich conference, for an update on recent trading. This is a portfolio holding with many attractive characteristics, and the company’s response to the pandemic has brought about an unexpected productivity benefit. Historically, one of the constraints to growth has been finding enough medically trained staff to handle its flow of customers, with eye tests and spectacles purchases often treated as separate store visits. However, post lockdown, the company has introduced a new booking system, which in the vast majority of cases, has led to spectacles being purchased at the same time as the eye test.

Within the RWC UK Focus Fund, Pearson performed well last week, with US undergraduate enrolment data falling by less than the company had expected this autumn. The company looks poised to benefit from the counter-cyclical nature of higher and professional education, as well as increasing interest in its online education services. The team made good returns from this stock as it emerged from the global financial crisis. From here, with a new chief executive in place, it offers both cyclical and recovery potential.  

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