Market outlook: the search for quality investments

Richard Dunbar

No company is immune to the effects of Covid-19 – some forced to close, others to adapt to meet social distancing or even surging demand. So when it comes to investing, it’s crucial to consider the health of companies on a case-by-case basis. Richard Dunbar, Head of Multi-Asset Research at Aberdeen Standard Investments, considers the search for quality.


The pandemic is affecting different sectors in different ways – from devastating loss to sudden growth. For instance, the energy and financial sectors have fallen significantly, while technology and healthcare have flourished. And, in many cases, the virus has accelerated existing ‘winning or losing’ trends.

But themes at a sector level can be misleading – no two companies are exactly the same. This month I look at examples of the disparities Covid-19 is causing across different sectors, and what this means for investors.

Example 1: The purpose of property

Commercial property, which was struggling before the pandemic, is one of the sectors worst hit by the impact of Covid-19. The fate of much commercial property (and many companies involved in commercial property) depends to a great degree on its purpose. Those that house traditional forms of leisure, like pubs and restaurants, aren’t going to recover as quickly as some other areas of the economy. 

Although we remain cautious about commercial property, there will be opportunities. Many companies will be re-thinking their office requirements. But at Aberdeen Standard Investments we believe that reports of the demise of the office are exaggerated – where offices are no longer required, alternative uses may breathe different life into city centres. 

Elsewhere, delivery warehouses are a hive of activity as online retailers meet surging demand. And other areas will recover – after all, we’re not going to stop going to pubs! 


Example 2: A mixed bag for retail 

John Lewis, Arcadia (the owner of Topshop and Dorothy Perkins) and Harrods’ are among the big retail names announcing cost-cutting measures. No in-store custom during lockdown, followed by the cost of implementing social distancing measures, not to mention lower tourist numbers in cities, has dealt a hefty blow to many retailers. Even those that adapted quickly to business online have faced additional costs – increasing distribution and paying overtime or recruiting extra staff. 

The food retail sector is generally a different story. It’s boosted by our move to eating and drinking at home rather than in restaurants and bars. Tesco saw first-quarter profits grow by 8% in the UK and Ireland, and by 4% in central Europe as its food sales increased 12%. But once again, even the food retailers doing well have been impacted by the pandemic. Costs are considerable to satisfy surging customer demand and social distancing requirements.

So analysing each company in depth will be key for considering which retailers to invest in. The high street was a challenging environment before coronavirus, yet many retailers remained successful. And this will be the case after it. 


Example 3: Taking stock of tech

Looking across the sectors, technology is surely the juggernaut, its momentum further fuelled by the crisis. Many of us were increasingly leading our lives online before the emergence of Covid-19 but now we’re reliant upon it. A lifeline to family and friends, a teaching aid, a means to order essentials, the ability to work from home – technology has gone from something to facilitate convenience and pleasure to something that’s critical. 

As Satya Nadella, the CEO of Microsoft, said recently, “Already we’ve seen something like two years' worth of digital transformation in just two months.  And we’ve seen how critical digital technology is in the three phases of this crisis, from the emergency response, to the recovery phase, to reimagining the world going forward”.

It’s no wonder that technology stocks have outperformed significantly this year – growth abounds from gaming stocks to service providers. IT infrastructure has come to the fore as companies move entire workforces to remote working and consider how to reduce costs going forward. One consideration is the maintenance of hardware such as servers and data centres. Many companies will move to using the cloud, which will benefit cloud providers such as Microsoft, Amazon, Google and Alibaba.

Interesting trends are appearing – the rapid increase in contactless payments is one. Early in the crisis, many retailers moved to card-only payments. And 50 countries, including the UK, increased limits on these transactions. This looks set to continue even as restrictions ease – a survey by Mastercard showed half of those new to contactless payments will continue to use them. This type of payment is increasing even in countries which were lagging digitally. 

And while there are obvious beneficiaries of the huge move from retail to e-tail, less obvious beneficiaries include those companies offering services such as data analytics and fraud detection. 

But the technology sector isn’t immune from risk. The dominant market positions of the leading technology companies will continue to draw regulatory attention. The authorities will monitor and punish anti-competitive behaviour. And finally, companies such as Alphabet (the owner of Google) and Facebook have business models reliant on advertising. The meteoric rise in their share prices might lead some to believe that these companies are immune to the ebbs and flows of the economic and advertising cycle. But this is unlikely to be the case. 

Once again it’s crucial to look at the factors that are and may affect companies individually. Overall, at Aberdeen Standard Investments, we have positive views on six out of the top seven technology companies. Many investors would view these companies as growth opportunities. But we prefer to think about it in terms of their quality – which leads me onto my next point. 


Three sectors – one lesson

I’ve only looked at three sectors here, but the story of ‘mixed fates’ spans all industries and sectors. Many companies won’t recover from this crisis, even if their industry is supported by the new ways we’re living and working. Equally, there are resilient, well-managed, innovative companies in the most troubled sectors. Many investors will navigate this uncertainty by following a ‘growth’ or ‘value’ approach.

Growth companies are those investors believe have potential to deliver superior profit growth over the longer term – which they hope is underappreciated by the market. 

Value companies are those that often have poorer growth prospects than other areas of the market but that investors think are available to invest in at a price below what they’re actually worth. Even with the lack of growth prospects, the market may be underappreciating the inherent value of the business. So this means investors effectively aim to ‘bag a bargain’ which may increase in value. 

Growth companies – mainly in the technology sector – led the rebound in March and April. But value companies, such as airlines and leisure companies, have had a renaissance of late and started to perform. 

However, at Aberdeen Standard Investments we believe the growth versus value divide is unhelpful. Our focus is on quality. Companies which demonstrate quality through their products or market positions, have strong cashflows and balance sheets, and are well managed. No matter the sector or size of a company, we do our homework. When we invest in a company, we make sure that our expectations of dividends and earnings – and our view of the price we should pay for these facets – are all robust. 


An essential approach in an uncertain outlook

While there are grounds for optimism on the progress of the pandemic in some areas of the world, there also remain grounds for caution in others. 

We’ve already seen irreparable damage to the global economy. And some serious damage to the profitability of many companies, as noted above. 

This means a granular approach to investing is essential, in other words, a need to:

  • rigorously assess each company individually
  • carefully diversify; investing in many different types of investments and geographical locations to help manage risk
  • take a long-term view


The information in this article should not be regarded as financial advice. Please remember that the value of investments can go down as well as up and may be worth less than was paid in. Information is based on Aberdeen Standard Investments’ understanding in July 2020.