As I write, it is Christmas Eve. The end of the year is an opportune time to reflect but there is still rather a lot to pack into the remaining eight days so I’ll defer that till January.
I am optimistic about 2021. The first quarter will be extremely difficult and perhaps the most challenging period of the pandemic. There will be light at the end of the tunnel; the media’s obsession with numbers will broaden from cases and deaths to include vaccinations. I believe we will return to normal by summer and a lot of the foundation will be laid in that bleak first quarter. There are around 12 million over 65s in the UK, making up c.18% of the population (source ONS, Europa.eu). Over 65s make up 90% of Covid deaths in the UK (source ONS). Vaccinating this cohort should facilitate an opening up of restrictions just as the weather improves, which will ease the underlying burden on the NHS.
The hurdles to achieving mass vaccination are substantial. The simple scale of the task is enormous. Around 500,000 people have been vaccinated in the UK in the first 2 weeks since regulatory approval. This sounds like an awesome achievement and it is, but at this rate it would be another 12 months till the most vulnerable were vaccinated and many years till we reached herd immunity. Consistent ramp up to over a million a week has to be the target. The Pfizer vaccine requires storage at -70°C, hence why the imminent approval of the AstraZeneca vaccine, which can be stored in a normal fridge, is so important.
Another factor to consider is that the most vulnerable are in some cases the least mobile and most isolated due to their age and health. A further issue is the breadth of vaccine scepticism. A Kantar survey in November suggested just 43% of people would definitely get a vaccine, 32% said they would probably get a vaccine (source Kantar, FT). Education and either direct or indirect pressure (e.g. restrictions on travel for those that will not have the vaccine) will help get people off the fence.
I do feel the UK equity market looks cheap and perhaps with Brexit out of the way investors can reassess the market, even if from a lower base. Our proprietary Long Term Capital Markets Assumptions have the UK as the highest return equity market in their forecasts. The Bank of America Fund Manager Survey saw the net % of fund managers underweight the UK improve from 34% in November to 18% in December, the highest it has been since February 2020. The UK is a generally considered a value market that is particularly unloved due to Brexit and the currency risk foreign investors have to take to invest. The market should become investable again once Brexit uncertainty is put to bed and a global economic rebound should drive earnings growth after Q1. An optimistic scenario of earnings growth and multiple re-rating would drive attractive total shareholder returns.
2020 has given us a number of lessons in expectation management, so while I hope the remainder of the ‘20s will be roaring, I’ll be planning on a meeker outlook.
The Long and the Short
The Long
Hikma is a generic drug producer. Customers want a reliable supply of high quality generics; an injectable generic can cost just $2.50 but not having it could lead to a surgery costing tens of thousands of dollars being delayed. The crisis has given Hikma an opportunity to demonstrate the quality of their service. The current CEO has greatly increased the breadth of the portfolio and pipeline, which has improved the visibility and the resilience of the earnings.
The Short
Photo-Me International manufactures and operates photo booths, laundrettes and children’s rides (the type you might see in a supermarket foyer for 50p a go). Photo booths and children’s rides rely on high footfall areas, trends of shopping online and WFH have reduced the footfall to their machines. Photo booths are under further structural pressure from the trend to DIY using smart phones. Laundrettes have been more resilient, but it is certainly not an area of growth.
Sources
Over 65s in the UK https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/ageing/articles/livinglongerhowourpopulationischangingandwhyitmatters/2018-08-13
UK population https://datacommons.org/place/country/GBR
Anti Vax data https://www.ft.com/content/f84746af-9a7f-4cc8-a3b5-434d4c08556e
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