In a speech to the House of Commons Winston Churchill famously described the Allies' win in the second battle of El Alamein as the “end of the beginning.” It was a wonderful, stirring speech and it was prophetic. Victory at El Alamein changed the course of the Second World War ultimately resulting in the allies’ victory in Berlin.
In November preliminary trial results on three COVID 19 candidates were released. All three offer real hope in the battle against the pandemic and, like victory at El Alamein, herald the end of the beginning in the fight. The importance of these developments cannot be over stated. They are life changing for communities hit hard by the pandemic and they light the path to a return to a more normal, albeit changed, economic life.
Financial markets are never shy to extrapolate news, both good and bad. The combination of certainty in the US presidential election and positive vaccine news added up to a massive confidence boost. Markets posted staggering numbers for the month.
The US S&P 500 Index was up 10.8%, the tenth strongest monthly return in the past fifty years.
The Russell 2000, measuring the performance of smaller US companies, had its strongest month ever.
The S&P Financials sector, banks are a key recovery trade, had its fourth strongest month ever
Similarly the S&P Industrials sector had its second strongest month ever.
November 2020 was one for the record books.
Digging below the surface the way prices have moved provides an insight on what the new normal, the World that emerges post vaccine, will look like.
The flash in the pan beneficiaries
There have been a small handful of companies that were clear but potentially short lived beneficiaries of the changes wrought by the COVID pandemic. The best examples are companies like Zoom and exercise bike company Peleton.
While I am reticent to rain on their parade both seem like “flash in the pan” beneficiaries of the pandemic with sizeable, but ultimately short-term, boosts to profitability. In the new normal they will be larger companies than they were pre pandemic but the one off boost they enjoyed will fade.
This has already been reflected in share prices with Peleton down over 15% from its highs and the Zoom share price falling even further. They had been flavour of the month, they are no longer.
The accelerators
While there were some companies that were short term beneficiaries of the pandemic, COVID has permanently changing the landscape for some companies in some cases accelerating existing trends, both good and bad. The COVID growth boost, or losses, in these cases will be long lasting with the businesses not likely to return to pre pandemic levels.
The ecommerce and cloud computing players, like Amazon.com, Next DC in Australia are good examples of this.
The share price path of the accelerators is instructive. These companies enjoyed a powerful surge in prices, accompanying the surge in business fundamentals, post the COVID sell off lows in March. Since the first hints of things normalising and compounded by vaccine news these companies have held their gains but broadly underperformed in the market in the past couple of months.
The market’s attention has turned to the post COVID world.
The back to the future plays
That leads to the “back to future” plays. These are the companies that oftentimes were the worst hit by the pandemic, but that have business models that were robust enough to survive and, as the health and economic outlook stabilise, are beneficiaries of a normalising environment.
These companies have enjoyed powerful rallies in November and in fact have been strong over the past couple of months. This includes parts of the banking sector offshore, tourism and retail and the airline and travel industry.
Our portfolios have fared well as market leadership has changed
It has been a remarkable year to be an investor. News flow and price movements have been volatile. Business strategy has had to be dynamic. And the difference between visionary management teams and the also rans has rarely been as stark.
This dynamic environment has meant more changes to our portfolios than is typical. This is most stark in our international share strategy where the team added six new companies in a short two month period earlier this year, the number we would usually add in about two years.
The team also actively repositioned the portfolio moving from an almost 100% exposure to the accelerators, companies like Amazon, Google and Paypal and pivoting towards those high quality companies that will benefit most from the recovering global economy, companies like Signature Bank, US bank First Republic and aircraft supply chain companies Heico and Hexcel.
This is active management doing its job and meant that our portfolios outperformed the broad market in COVID sell off and have been able to match or in some cases eek out outperformance in the powerful rebound of the past few months.
Enjoy Christmas 2020
On a personal note it has been a real pleasure to be part of your investing lives over 2020.
2020 has had everything; a dramatic sell off, an equally dramatic rally, a global pandemic and headlines none of us would have ever thought we would see. It has been the most incredible roller coaster.
We have all earned a good Christmas break. For the Fisher Funds team I am proud of how they adapted to the challenging environment and put their energy into helping our clients and in making good decisions in portfolios.
For our clients, thank you for your support and engagement over the year. It is times like this we all learn and become better investors.
So please enjoy the break, enjoy time with the people most important in your lives and let’s look forward to 2021 knowing that, at least from a health perspective, progress is well and truly heading in the right direction.
Merry Christmas and happy holidays,
Frank.
