While many analysts and investors see reason to be cautious at the moment, Jeremy Lang, Fund Manager of the Nedgroup Investments Global Behavioural Fund, sees things differently.
He believes the current environment is conducive to good investment opportunities and that the recovery we are seeing is not a normal recovery.
“We are particularly excited about the opportunities in the areas of growth stocks and recovery stocks and the availability of free cash flow – all of which make for an extremely unusual environment for recovery,” he says.
Disruptive growth businesses
There are were a lot of interesting growth themes simmering below the surface pre-Covid which have been massively accelerated as a result of the pandemic – many of them unexpectedly so. This is one of the reasons Lang says the world is never going to return to ‘normal’.
Normally in a recession-environment, small businesses fail and consequently not a lot of small businesses are created, but in this period the opposite has happened. Where people were expecting demand to disappear completely in some industries, it has essentially exploded.
It’s the same for recovery businesses. “Lang says this has been a totally different kind of shock which has forced many businesses to really think about what they are doing and essentially start again. Companies that are demonstrating the ability to re-imagine themselves are creating huge investment opportunities.
He cites the example of Capri – distributor of brands such as Michael Kors, Jimmy Choo and Versace. Their distribution channels, which were already struggling before Covid, completely shut down when the pandemic hit and they have had to tear up the playbook and start again. They have embraced e-commerce, completely rethink about their supply chain and revolutionise how they conduct their operations. The breadth of what they have been prepared to do with the business has been exceptional. We are seeing great opportunities in businesses like this.
Free cash flow availability
Finally, Lang says, a lot of this acceleration has made businesses a lot leaner. Businesses have been able to take advantage of huge amounts of free cash flow. Returns are exploding and there is liquidity everywhere.
Not a standard recovery
Lang stresses that the recovery we are seeing now is not a standard recovery.
Usually in a recovery we would expect to see a cycle of: massive shock which knocks the global economy sideways, concern about the future of capitalism, leading to government intervention in the form of monetary stimulus to kick-start recovery - at which point investors start to worry about what will happen when the government takes the support away. However, this recovery is different because of what caused this shock - Covid.
This shock has forced everyone to rethink what they do – focussing on efficiency and doing things differently. This is the kind of shock that really energizes economies.
The whole economic structure has been rethought and a tremendous amount of potential has been unleashed, which we think is tremendously exciting. This has been going on underneath all of the focus on government stimulus and global economic recovery.
CEOs are more cautious
Lang and his team generally view CEOs of companies as dangerous, however he concedes that there are times when the experience of a severe shock such as Covid, tempers the behaviour of CEOs and makes them temporarily more responsible in their decision-making.
Land and his team anticipate that this behaviour will revert back to normal once CEOs forget the feeling and the trauma of this shock – but for now, it is possible to trust what many CEOs are saying about their businesses, if only temporarily.
According to Lang, the overwhelming narrative from CEOs is that this is a normal recovery.
Forecasters too sceptical
Lang says analysts and investors are too focussed on valuation levels and are overlooking the widespread structural changes occurring beneath the surface.
There have been a record number of surprises through this recovery – which tells the team at Ardevora that the forecasters are wrong. They are too sceptical.
Investors are also sceptical. Stock prices are proving to be resistant to the very powerful recovery numbers coming through and, as a result, valuations have compressed a lot.
People are very worried about valuation levels, but Lang is more concerned the path through time that tells me about scepticism – and I see a lot of scepticism. He sees a pattern which suggests a narrative that this is as good as it gets and won’t continue once governments stop propping up the economy. But if you look down below there are a lot of structural changes happening which are extremely exciting.