Asian consumers, boomerang businesses and M&A likely to shape 2021
It was some year. Anyone who took on the challenge of forecasting what would happen in 2020 more than likely saw it all swiftly swept aside – but, as they say, prediction is very difficult, especially when it’s about the future.
Still, investing is a forward-looking profession and so we inevitably find ourselves thinking about what will come to define the economy. Despite a more restricted Christmas than anticipated and another lockdown, we go into 2021 with more optimism than was the case even a few months ago.
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Whilst it may be a difficult start, this year we expect to see a more sustained recovery, supported by the development and distribution of successful Covid-19 vaccines, the continued rise of technology, the deployment of record levels of consumer savings and a more collaborative US president. Within these macro trends, there are a host of other themes that will likely shape markets – in some cases they are already taking hold.
There was a significant rise in M&A involving UK companies in late 2020 – the likes of RSA Group, TalkTalk, William Hill, and McCarthy & Stone to name a few. Yet, a lot of these are what might be described as ‘mid-ranking’ or ‘unremarkable’ companies.
We expect to see this M&A trend evolve into 2021 with activity moving towards weaker and stronger businesses. Companies like Sage or perhaps FirstGroup fall into this category, given their issues in lockdown and even prior to the pandemic. Crest Nicholson could be another, with its history of ownership and private equity’s penchant for returning to familiar assets. Admiral, as a high-quality business, could attract a larger rival.
Perhaps conversely, with parallels to the economic situation at the beginning of the 1990s, we could also see some of the UK’s household names make big moves to prove their relevance and commitment to long-suffering shareholders.
GlaxoSmithKline, for example, has been linked with a split in its consumer and healthcare businesses since 2017. Similarly, a weak share price in 2020 accelerated thoughts of strategic change at Aviva.
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However, the big question for some companies will be whether they make a quick return to form or suffer long-term consequences from the pandemic – are they boomerangs or zombies?
Some businesses are in tricky strategic positions, such as Royal Dutch Shell which will need to exert a great deal of effort exiting the oil and gas markets it spent so long cultivating. Others, like Diageo, seem primed to jump back into action with the return of its premium markets like hotels, events, and duty frees.
There could be geographical swings too and none more significant than an eastward shift in consumption. For years, Asia has relied on other parts of the world to absorb the goods it produces, but 2021 could be the year that changes, with consumers in Asia – especially China – becoming the markets for their own products.
This could be a crossroads moment and investors would do well to identify companies with exposure to Asia. Some will be familiar – LVMH, Apple, and InterContinental Hotels Group among them. Others will not and the best way to access these will be through collective vehicles such as Allianz China and Morgan Stanley Asian Opportunities.
Of course, 2021 will no doubt still have its challenges and one of them is likely to be income. Dividends are historically economically sensitive and look unlikely to return to 2019 levels soon – not least to retain flexibility on balance sheets for further bumps in the road.
The key for investors will be to look ahead, rather than to the past, for sources of income. Yields of 4 per cent are likely to be the outer edge and investment trusts like Finsbury Growth & Income, Troy Income & Growth, and Murray Income may well be the places to find them.
Among the many things it has shown, 2020 is a case in point when it comes to uncertainty of predictions. We can, nevertheless, say with some degree of confidence that 2021 can only be better.