Insight Article Desktop Banner
 
 
Global Equity Observer
  •  
juin 12, 2020
Unlocking the Future – The Post-COVID World
Insight Video Mobile Banner
 
juin 12, 2020

Unlocking the Future – The Post-COVID World


Global Equity Observer

Unlocking the Future – The Post-COVID World

Share Icon

juin 12, 2020

 
 

Our Global strategies are about resilience. We have a resilient team, working very effectively from home; a resilient investment process, checking that the companies in the portfolio will be able to continue to compound and avoid any permanent destruction of capital; and perhaps most importantly a resilient portfolio, which has once again delivered reduced downside participation in tough times.

 
 

This resilience does not mean that nothing has changed for our portfolios in 2020. We laid out our approach to thinking about COVID-19 in our March update. It divided the impacts into three buckets:

  • First, there are the direct effects of the virus, and the efforts to control its spread. 
  • The second is the indirect effect of the sharp economic downturns that have resulted around the world.
  • The third is how the world is going to going to be changed once the crisis is finally past, and how this will affect both sectors and individual companies.
     

Our view is that the focus is moving from Bucket 1 to Bucket 2, as developed markets exit lockdown, but that it is far from clear that earnings expectations… or multiples… reflect the challenges ahead. There is plenty of thinking still to do on Bucket 3, but the ability to deal with the shift from the High Street (or Main Street) to the Digital Street will be one clear area of differentiation.

 
 
"
The ability to shift from the High Street (or Main Street) to the Digital Street will be a clear area of differentiation”
 
 
 

Bucket 1: The Direct Effects

Our base case was, and remains, severe lockdowns lasting roughly a quarter followed by a period of disruption due to social distancing. Clearly, some sectors have been severely affected, notably travel, eating and drinking out, while non-urgent operations have been deferred in hospitals. The list of potential beneficiaries is shorter, such as food retail, sanitising products and software. As mentioned in previous updates, we have trimmed our exposure to beverages, due to our worries about a sustained disruption to ‘on-licence’ sales, i.e., bars and restaurants, which make up around half of revenues. However, in general, as developed markets emerge from lockdown, our focus is moving away from the direct impact of the crisis to the resultant downturns.

 
 
"
While the start of the recovery may be sharp, the crisis is likely to leave plenty of scarring”
 
 
 

Bucket 2: The Downturn

There is now a small industry speculating about the shape of the economic recovery path, with talk of ‘V’, ‘U’, ‘W’, ‘Swoosh’ and ‘Reversed Square Root’. The word ‘unprecedented’ has been used a great deal, but this is because an unprecedented hit to demand is meeting an unprecedented level of government intervention. While the start of the recovery may be sharp, as lockdowns are relaxed and suppressed spending snaps back with the reopening of shops, the crisis is likely to leave plenty of scarring, as illustrated by the 40 million in unemployment claims over the last 10 weeks in the USA, even before worrying about a second wave. We are not top-down macro analysts, and admit to being temperamentally conservative given our focus on quality, but nevertheless we struggle to imagine that the MSCI World Index’s 2021 earnings will be down only 2% on the 2019 level, as consensus suggests.

If we are indeed too cautious, and 2021 earnings do roughly match the 2019 level, this still implies that COVID-19 will have caused two years of lost earnings growth, yet the MSCI World Index is only down 8% YTD. This modest fall is from market levels that were already expensive at the start of the year, when the MSCI World Index was on 17x consensus 2020 earnings, meaning that we are now over 17x the potentially optimistic 2021 consensus. There are only two ways to lose money in equities, the earnings going away or the multiple going away, and right now after a 35% rise in the MSCI World Index since late March, we are worried about both.

The good news is that our portfolios are not invested in the Index. Instead, they are invested in high quality companies, the ones able to sustain their high returns on operating capital over the long term, or “compounders” as we prefer to call them. They are showing their relative strength once again. Lockdown hasn’t locked them out. When you consider where compounders are usually found, it is mainly in a few distinct parts of the equity market; consumer staples, software & IT services, and health care. Over 80% of our portfolios are concentrated in these areas, which own hard to replicate intangible assets including brands, networks, patents and licences, giving them pricing power, evidenced by high gross margins. These resilient characteristics have contributed to their relative outperformance compared to the broader market so far this year.

The other advantage compounders have is that when times are challenging, as they are now, they still experience demand thanks to their recurring revenue; patients continue to need saline solutions or dialysis, people still buy everyday essentials from cleaning products to diapers, and businesses depend on IT systems to operate and communicate. The earnings growth may well slow in a sharp downturn, but not nearly as dramatically as for companies facing outright order cancellations for engines, large loan losses or falling prices for a commodity - all problems severely exacerbated if the companies are financially leveraged on top of the operational leverage.

 
 
"
COVID-19 has revealed the importance of remaining relevant, having the right routes to market, of being dynamic and flexible”
 
 
 

Bucket 3: The Post-COVID World

The team’s main focus up to now has been on dealing with Buckets 1 and 2, modelling the combined impact of the health crisis and the likely economic crisis, and stress testing even more adverse scenarios. However, thoughts are moving towards Bucket 3, the longer-term. COVID-19 and the efforts to contain it have revealed the importance of remaining relevant, of having the right routes to market, of being dynamic and flexible.  As mentioned in April’s update, the virus is acting as an accelerator, particularly around the digitization of the economy. Those who had the vision to invest in “Virtual Street”, to bring their businesses online from the High Street, are seeing the benefits. Today, you can create and order a running shoe unique to you, you can order products from all around the world from your own home, you can use your mobile’s camera to assess your skin tone and then order makeup that works for your tone from your phone, you can work from home, you can collaborate with the likes of Teams and Zoom, and invest and save and pay – all online. The way we work, the way we buy, the way we learn, the way we meet, the way we are entertained and even the way we get fit – digitization has given all these habits a new channel, a channel that many millions have become much more accustomed to in a much shorter period of time than can ever have been imagined.

 
 
"
Being able to build digital moats has become an increasingly essential characteristic of a high quality compounder”
 
 
 

If you have not invested in the new, if your products and services can’t be reached, or seen or bought or even delivered to you, but someone else’s can, then you’ve failed to remain relevant to your consumer or your customer, whether B2B or B2C. As investors, as portfolio managers looking to understand long-term risks and opportunities, it has always been clear to us that companies have to invest to remain relevant if they are to sustain returns. We’ve always invested in high quality compounders, it’s been our philosophy for over 25 years, but where we have found them and what we have had to worry about for them has changed over the quarter century. Today, being able to build digital moats, where relevant, to defend, enhance and extend your franchise has become an increasingly essential characteristic of a high quality compounder.

 
 

RISK CONSIDERATIONS

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equity securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. Option writing strategy. Writing call options involves the risk that the Portfolio may be required to sell the underlying security or instrument (or settle in cash an amount of equal value) at a disadvantageous price or below the market price of such underlying security or instrument, at the time the option is exercised. As the writer of a call option, the Portfolio forgoes, during the option’s life, the opportunity to profit from increases in the market value of the underlying security or instrument covering the option above the sum of the premium and the exercise price, but retains the risk of loss should the price of the underlying security or instrument decline. Additionally, the Portfolio’s call option writing strategy may not fully protect it against declines in the value of the market. There are special risks associated with uncovered option writing which expose the Portfolio to potentially significant loss.

 
william.lock
Head of International Equity Team
International Equity Team
 
bruno.paulson
Managing Director
International Equity Team
 
 
 
 

DISTRIBUTION

This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

Ireland: Morgan Stanley Investment Management (Ireland) Limited. Registered Office: The Observatory, 7-11 Sir John Rogerson’s, Quay, Dublin 2, Ireland. Registered in Ireland under company number 616662. Regulated by the Central Bank of Ireland. United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA. Dubai: Morgan Stanley Investment Management Limited (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). Germany: Morgan Stanley Investment Management Limited Niederlassung Deutschland, Grosse Gallusstrasse 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG).. Italy: Morgan Stanley Investment Management Limited, Milan Branch (Sede Secondaria di Milano) is a branch of Morgan Stanley Investment Management Limited, a company registered in the UK, authorised and regulated by the Financial Conduct Authority (FCA), and whose registered office is at 25 Cabot Square, Canary Wharf, London, E14 4QA. Morgan Stanley Investment Management Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 08829360968. The Netherlands: Morgan Stanley Investment Management, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of Morgan Stanley Investment Management Limited. Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Switzerland: Morgan Stanley & Co. International plc, London, Zurich Branch Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0) 44 588 1074.

U.S.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus please download one at morganstanley.com/im or call 1-800-548-7786. Please read the prospectus carefully before investing.

Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley funds.

NOT FDIC INSURED |OFFER NO BANK GUARANTEE | MAY LOSE VALUE |NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A DEPOSIT

Hong Kong: This document has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this document have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This document should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”); (ii) to a “relevant person” (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. This publication has not been reviewed by the Monetary Authority of Singapore. Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.

Japan: For professional investors, this document is circulated or distributed for informational purposes only. For those who are not professional investors, this document is provided in relation to Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”). This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ exercises the delegated authorities based on investment decisions of MSIMJ, and the client shall not make individual instructions. All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This document is disseminated in Japan by MSIMJ, Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: the Japan Securities Dealers Association, The Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association.

IMPORTANT INFORMATION

EMEA: This marketing communication has been issued by Morgan Stanley Investment Management Limited (“MSIM”). Authorised and regulated by the Financial Conduct Authority. Registered in England No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the strategy’s / product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing.

This material is a general communication, which is not impartial and has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Except as otherwise indicated herein, the views and opinions expressed herein are those of the portfolio management team, are based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date hereof.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific Morgan Stanley Investment Management product.

MSIM has not authorised financial intermediaries to use and to distribute this document, unless such use and distribution is made in accordance with applicable law and regulation.

Additionally, financial intermediaries are required to satisfy themselves that the information in this document is appropriate for any person to whom they provide this document in view of that person’s circumstances and purpose. MSIM shall not be liable for, and accepts no liability for, the use or misuse of this document by any such financial intermediary.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without MSIM’s express written consent.

All information contained herein is proprietary and is protected under copyright law.

 

Les utilisateurs sont invités à prendre connaissance des Conditions d’utilisation avant d’engager toute procédure, car celles-ci mentionnent des restrictions légales et réglementaires applicables à la diffusion des informations relatives aux produits d’investissement de Morgan Stanley Investment Management.

Les services décrits sur ce site Web peuvent ne pas être disponibles dans certaines juridictions ou pour certaines personnes. Merci de consulter nos Conditions d’utilisation pour de plus amples informations.


Confidentialité    •    Conditions d'utilisation

©  Morgan Stanley. Tous droits réservés.