It may seem that financial markets have been immune to the global pandemic.
Since mid-February 2020 to date, based on the S&P 500, share prices have risen over 30 per cent against a horrific social and economic backdrop.
Unprecedented fiscal support and unparalleled vaccine development have been huge drivers of this robust financial market performance. It is an outstanding result.
This is not to say that financial markets have been stress-free. While at the top level, stocks have been fine, we have seen huge divergences in performances between sectors as the pandemic has dealt a crushing blow to some, and opportunities to others.
We know all too well where the pain has been felt, in sectors such as airlines, hospitality and leisure. E-commerce companies on the other hand have been able to progress at even faster rates than hitherto. The gap between the best- and worst-performing sectors in the stock market exploded. At the start of the pandemic the spread was 27 per cent but this had surged to 80 per cent over the past 15 months – the widest margin in recent history.
But the impact of the pandemic goes deeper yet. Even within sectors, we have seen seismic shifts between the leaders and the laggards – and critically it is not that clear how reversible this may be.
Retail is in the front line. The gap between winners and losers within this sector is among the widest of all industries.
The retail landscape moved through periods of grocery hoarding, followed by clothing overstock and faced new consumer behaviours met by new business practices that may permanently re-shape the industry.
The levers for success are clear. The pandemic provided strong tail-winds to those retailers with already strong omni-channel presence. A McKinsey report concludes that those companies, usually with tech-forward business models, that “were seemingly inches ahead before the crisis gained miles on the competition” through the pandemic.
An ability to cater on line for those nesting or embracing new hobbies and lifestyles was key. Lock-downs were positive for those retailers with strong digital footprints. But others such as retailers reliant on office workers or business apparel faced existential challenges.
Scale was also a key part of the recipe for success. Five companies in the US accounted for more than 80 per cent of the stock market performance of the retail sector. And companies who had the advantage of scale at the beginning have grown even bigger.
Are there pointers for the future in what we’ve seen?
Firstly we cannot really regard retail as a wholly homogeneous sector – there has been too wide a range of experience and investment performance. The ability to adapt to what are likely to be continually changing circumstances and fast decision making will continue to be a hallmark of the winners. It is likely that retailers continue to see digital investments as a priority — whether they have their own eco-system or work with partners. Next step will be Improving the profitability and efficiency of that on-line channel, which may include increasing the average basket value or using local stores for fulfilment rather than large distribution centres.
Focus will matter — especially for multi-channel players. For example multi-channel operators such as Zara, H&M have been challenged from store closures which have had knock-on effects on overall business.
For other retailers it may be a question of “sticking to the knitting” more than ever. Burberry, the global top-end brand, produced very positive figures this week and feel they have transformed their business. More than ever, they are fully anchored in luxury. This means a reduction in wholesale activity, a big cut-back in mark-downs and opening new stores to ensure full control of the customer experience.
Indeed if on-line is key for this retail future, we also shouldn’t expect it to be a “one-way street”. Recently Asos, the global retail platform, announced a moving of some Topshop brands, which they had recently bought, back into the brick and mortar world with their Nordstrom deal in the US.
There is clear potential in this broad sector. This can be seen, for example, in the current bids on the table for UK supermarket Morrisons. Would-be investors are willing to pay close to 50 per cent premium to where shares had been trading. Company management feel their performance through the pandemic has improved their standing. Bidders feel there is more to come.
The other positive undercurrent for the sector is the pent-up spending we are likely to see as conditions improve. Goldman Sachs estimate that forced savings in the Euro area amount to just under 20 per cent of quarterly Euro area pre-pandemic GDP.
This could mean a lot of spending. For retailers, being positioned right, for this more positive wave, is key.
Eugene Kiernan is an independent investment strategist and is president of the Chartered Institute for Securities and Investment