Active investment commentary & analysis

Our homes have become our castle

As lockdown unwinds, the consumer sector looks scarred. Few expect a return to normality this year or next. Long after restrictions have been relaxed, hospitality and travel in particular could continue to suffer from consumer fear. But some positive new trends are emerging. Remote working with closer family living has spurred renewed interest in the home environment. Our homes have become our castle.

The way we live our lives has changed fast, and we will not go back to how we were. Ecommerce has proven its convenience and reliability, creating opportunities for retailers with a robust online strategy. Logistics companies are also gaining from this. And there is a renewed focus on wellness and exercise. Home entertainment is also booming, driven by an explosion in gaming and the impressive signups for Disney+. We will be spending more time in our homes for the foreseeable future, and will invest to make them comfortable and stylish.

Even after offices re-open, some of this change in work/life balance seems likely to continue into the recovery. A range of mid-cap companies should benefit from increased demand for online entertainment, e-commerce and home delivery. Companies in this space include Games Workshop, JD Sports and LondonMetric. LondonMetric supports delivery logistics, which may involve shorter supply chains.

Following this change in office/remote working balance, businesses are likely to demand more enterprise support services; supporting cloud, data, mobile services and virtual operations. Many firms will move their existing remote work onto more robust systems, and strengthen cybersecurity. Suppliers of these technologies were typically already disrupters in their categories and have proven their agility in offering differentiated services in scalable ways. Companies in this area include Kainos, Softcat and Gamma Communications.

History shows that economic shocks often drive long-term social change. While the lockdown has damaged the economy, there have been identifiable benefits to wellbeing and the environment. More emphasis is likely on sustainability and health. At the same time, in many companies the governance model has failed to deliver genuine resilience. Although the shock was unexpected, too many listed companies seemed focused on business as usual. Executive rewards and high dividend payouts often raise risks.

Shareholders may encourage boards to do more for resilience and sustainability. Government intervention in the economy will create the potential for greater national influence on some businesses and industries. This may reinforce the pace of change. Companies assisting a low carbon economy, such as Ceres Power in fuel cells, could benefit from public interest in quicker action on the environment.

Undeniably, some consumer businesses face great uncertainty over demand and the timescale in which that might correct. And, if companies do encourage more working from home, activities based in city centres would see reduced demand. Retailers, pubs and restaurants that rely on footfall from office staff will face a headwind. This would be a negative for city centre properties.

Physical assets in the wrong place will see value decline. The crisis has heightened the contrast between legacy businesses and well-adapted agile disruptors. Where consumer businesses have a proven online strategy, or can take market share from weaker rivals, prospects are brighter. Many of these growth businesses have had to operate with lean capital-lite business models. There is little pressure on them now to raise new capital and they may be in a position to acquire weaker rivals. And technology-based business models with fewer staff than older incumbents are less exposed to pensions costs. Low interest rates could move older pension schemes into deficit, raising costs. The gap between businesses like Ocado and Tesco seems set to widen.

Changes in tastes are often slow to evolve, but persistent once set. The crisis has accelerated trends towards sustainability and wellbeing, creating new opportunity. At the centre of the resolution is a shift in sentiment to the home environment. This investment theme could shape the economy for the decade ahead.

A version of this article was published on on 05/06/2020.