Two years ago the world was in chaos as the pandemic gripped the attention of governments and citizens around the world. Every single country was affected in one way or another by the events of 2020 (some more than others) and while the worst of the medical challenges might now be behind us, it looks as if we’re going to be living with the economic repercussions for many years to come.
I’ll admit I don’t have as much experience as some market commentators, but I don’t think it’s an understatement for me to say that the last three years have been some of the most challenging of all time for the investment community – especially in the UK.
Not only have UK investors had to deal with the pandemic, but they’ve also had to deal with the uncertainties of Brexit, political instability and now inflation. That’s without mentioning the war in Ukraine and the Europe-wide energy crisis.
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These macro challenges have been behind some enormous fundamental business shifts, which have inspired large capital flows into different sectors. And trying to make money from these shifts has been incredibly difficult.
Making money from the changing environment has been difficult
A great example is e-commerce. During the pandemic, internet sales as a percentage of total retail sales hit 40%. Some analysts believed that this represented a structural shift, and consumers would never go back to shopping in stores.
The market bought into this narrative. Online retailers such as Ocado (LSE: OCDO), Asos (LSE: ASC) and AO World (LSE: AO) saw their shares outperform the wider market (Ocado was the second-best performing FTSE 100 stock in 2020 after the Scottish Mortgage Investment Trust (LSE: SMT), returning nearly 100%).
Related businesses also shared the limelight, think so-called big box fulfilment facilities operators such as Tritax (LSE: BBOX).
A combination of factors has now taken the wind out of the sector’s sails. Rising wage and fuel costs have pushed retailers to increase delivery costs for customers, while higher shipping costs have also eaten into margins. Meanwhile, the rising cost of living means consumers are being more cautious about spending their money. They don’t want to pay to have something delivered and then pay to return it when they can just go into a store.
As a result, online sales as a percentage of total retail sales have fallen back to below 25%. This is still above the pre-pandemic level of below 20%, but as most retailers were driven online during the pandemic, competition in the space has only increased. There are now more retailers fighting over a smaller market while having to deal with higher costs and consumers that are facing declining spending power.
Analysts who predicted the world would emerge to a “new normal” after the pandemic were right to a certain extent. Online sales have increased, the world has become more digitally capable and flexible working has become the norm for most businesses. But the new normal looks more like the old normal than something completely new, and that’s why the market has been so challenging to navigate since 2019.
The future does not look so different to the past
This pandemic roadmap might offer some guidance as to how to invest for the next 12 to 24 months. The world is facing an economic crisis, driven by high energy prices, pandemic disruption and the largest war in Europe since World War Two. These challenges will have an impact on companies and consumers in the near-term – there’s no denying that.
Nevertheless, these headwinds are unlikely to disrupt long-term consumer trends and interests. And that’s where I think investors should be looking to deploy their capital right now.
Indeed, in my view there is no point in trying to predict which companies will do well over the next 12 months based on the current economic climate (ie, high inflation, falling real wages and high energy prices) because the world is changing so quickly.
Instead, investors should be looking for companies that have the qualities required to prosper in the long-term (five years or more). Generally speaking these qualities are some sort of competitive advantage, such as scale or a unique product and a growing market to sell into globally.
Two of my favourite picks in the UK are Diageo (LSE: DGE) and Relx (LSE: REL). I think the Finsbury Growth & Income Trust (LSE: FGT) (managed by Nick Train) also owns a portfolio of companies that meet these qualities.
I reckon it’s also important to look outside of the UK at this point. Europe is facing an economic slump driven by record-breaking energy prices. In the US, prices are far lower, and, while the economy has its own headaches, its outlook seems a bit brighter.
The market across the pond is also home to international tech champions such as Microsoft (NASDAQ: MSFT), which owns one of the world’s largest cloud computing networks. Demand for these services is only going to expand, and it makes sense to own the largest operator in the sector with its world-beating brand and financial firepower.
I’d also highlight Estee Lauder Cos. (NYSE: EL), which owns a portfolio of beauty and cosmetic brands. Humans have been trying to improve their looks for millennia, a long-term trend that’s not going to stop in a recession (although sales might slow). Both the company’s size and the value of its brands give it an edge in its markets, and it might be worth a closer look for long-term growth on that basis.
Yes, the future is uncertain, but as the past couple of years have shown, the future in the long-run might not look so different from the past.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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