Callum Abbot JPM

Written by Callum Abbot

August, 2020

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The long and short of it: Review of markets in July

It has been great to have test cricket being played again. A sport I am utterly useless at (and one I found pretty dull throughout childhood) but as I’ve grown older, and duller, it’s really become one of my favourites. I think it must be something to do with the comforting natter of Test Match Special on the radio and the ease with which you can dip in and out of a match that makes it so enjoyable.

From sport to the markets which have been less exciting this month which, for many will be a welcome relief! The market price level is broadly unchanged at the end of the month although it has oscillated through it. As ever there were somethings for the bulls and somethings for the bears.

A rise in infections in Northern Spain has led to a tightening of restrictions in this region of the country. The UK has imposed a blanket quarantine on all arrivals from Spain, which will be yet another devastating blow to Spain’s tourist industry and the country’s economy. It will have broader repercussions on travel and tourism as consumers weigh up the risk of quarantines being imposed on holiday destinations. The World Tourism Organisation estimates the pandemic has cost the industry $320bn in January through to May and the devastation is far from over. 

If infections continue to rise in Spain, it will inevitably lead to concerns about how difficult preventing a second wave is while easing restrictions and stimulating economic activity.

On a more positive note, the European Union signed off the recovery fund which provides €750bn of stimulus with a bias towards the peripheral nations. It is a show of unity that further integrates the union and should benefit those that need it most. Spending will be focused on green and sustainable projects. This is a theme we are seeing in many nations, as governments look to stimulate their economies through sustainable projects.

The US seems to have wrestled back control of the virus, with new infections peaking, but the measures to gain control will start to show through in stuttering economic data. Congress are under pressure to conclude talks on a further fiscal package to help support economic recovery.  The GOP’s $1tn package is materially smaller in scale than the Democrats’ proposed $3tn package. US-Sino relations continue to be rocky, something which is likely to continue to rumble along in the background. It is difficult to see how these two powerhouses can co-exist without some tension. This is not to say the tension needs to flare up uncontrollably, but it will bubble away.

The most exciting news over the month was data on vaccines. Phase 2 data, from several trials, showed potential. There are currently six vaccines in phase 3 trials. These trials will be comprehensive but expedited and success would facilitate a return to some sort of normal. The sheer weight of intellect and capital being spent on vaccines gives me hope that there will be success stories here. In the meantime positive developments on the therapeutics side of things means those that do get seriously ill are increasingly likely to survive and be out of hospital more rapidly.   

August this year will be busy as companies report first half results. This will give investors an insight into how the first stages of re-opening have gone and whether companies have needed to reassess their scenario planning for the rest of the year. 

The Long and the Short

The Long

Avon Rubber is an aerospace & defence conglomerate. The most exciting part of the business is the division that makes protective and respiratory products for police, armed forces and fire services. The other part of the business makes dairy and farming machinery which is being divested. The divestment will provide capital that can be invested into the remaining business as well as financing bolt on acquisitions to complement their existing product portfolio. The protection and respiratory products are market leading, mission critical and have resilient end markets. We expect continued innovation to drive demand for their products and support strong organic growth, which will likely be supplemented by M&A. In a low growth world, this is an attractive proposition and helps explain why the stock is up over 60% year to date.   

The Short

Senior is also an aerospace & defence conglomerate. All parts of its business are facing material headwinds. Its autos/truck business has been in decline for several years and the issues appear to be structural. The aerospace business is heavily reliant on the 737 Max, which was impacted by the grounding of the plane following system failures that led to tragic plane crashes. The aerospace business has also been hit again by the impact of Covid 19 on air travel. While 2020 may be the trough, it is not obvious that they have a competitive advantage in any of their products and endmarkets look vulnerable. This position has been one of our best alpha generators year to date.

Sources: World Tourism Organisation, July 2020. CNN, ‘Here are the differences between the Democratic and Republican stimulus bills’ 28 July 2020.

The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.

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