The Great Recovery following the Great Lockdown

The Great Recovery following the Great Lockdown
A year ago the corporate community was in a state of shock, struggling to understand how the COVID-19 pandemic would impact their businesses and the broader economy. The tone set by CEOs of leading Australian companies at Macquarie's 2020 annual investor conference was one of a high degree of uncertainty. Twelve months on and the comments made at this year's conference couldn't have been more stark.

Experiencing never seen before levels of fiscal and monetary support combined with the stringent management of the virus in Australia, senior management were increasingly optimistic as they looked to life in a post-COVID world. Many of the companies who presented this year provided positive trading updates with some even having sufficient visibility in their outlook to provide earnings guidance.

The number of companies presenting was notably higher than last year with additional presentations given by experts on a number of broader topical issues including COVID-19 healthcare, the global energy transition and the digital revolution. The key themes to come from the conference were:

  1. Inflation: the headline rate is accelerating but will it be sustained?
    This has become the issue for investors lately. Multiple companies pointed to input cost pressures. While some highlighted supply constraints, it appears the main culprit (at least so far) has been that demand has outstripped supply. Driven by fiscal stimulus, record low interest rates and the inability to travel abroad, consumers have been spending big across goods retailers (think furniture, electronics, home improvement etc). As the world progressively re-opens, we (and company management) expect this to normalise. Of larger concern for markets would be a sustained lift in underlying inflation, which remains unclear at this juncture.

  2. Energy Transition and Sustainability: industry has embraced the inevitable change while government continues to frustrate the process
    Last year was a watershed moment as renewables overtook fossil fuels as the European Union's largest source of electricity generation. Clear evidence the world is now well on the energy transition path. Consensus is that the shift away from fossil fuels will encompass a variety of technologies including wind, solar and green hydrogen. Energy consultant, Worley remains at the forefront of assisting the energy and metals & minerals industries in this shift. Unfortunately, we noted a strong sense of frustration from various management aimed at policymakers (particularly the Federal government) that have failed to provide industry with a clear policy framework. Corporate Australia will not invest until they have policy certainty!

    Sustainability issues are also permeating into industries outside the resources space. Residential developer Stockland, consumer product packager Amcor and fruit & vegetable grower Costa all dedicated notable portions of their remarks to this issue.

  3. Digital Transformation: last year's theory is now fact
    Following theoretical remarks made at last year's conference, the acceptance of digital technologies within our personal and working lives has become more engrained. Households forced to buy groceries and clothing online during last year's lockdown for the first time are continuing to use this channel despite the reopening of our economy. In the office, an increasingly flexible working environment means data needs to be readily accessible irrespective of an employees' location. On-premise computer servers are quickly becoming redundant as the majority of businesses' data is now being kept in the cloud. This has driven an explosion in the construction of new buildings in major CBDs: data centres. These windowless buildings house the countless servers being used by the major cloud operators Amazon, Google and Microsoft as well as small to mid-sized businesses.

  4. Healthcare: depending on your business, COVID has either been a blessing or a curse
    While the rollout of vaccines is underway, many regions are still being impacted by lockdowns. Ramsay Healthcare's trading update at the conference was slightly weaker than expected as their UK, French and even WA & Victorian hospitals were unable to conduct elective surgeries while their regions remained in varying stages of lockdown.

    However looking to the medium-term, public hospital waiting lists continue to grow as surgery delays continue. We believe the private sector will play an important role in assisting to reduce wait times. Further, underlying demand for healthcare products and services has not been destroyed by COVID-19, rather they've simply been deferred. This pent-up demand is waiting to be released as regions continue to reopen.

The key takeaway from this year's conference is clear: the rate of change in the world has been accelerated by COVID-19. As investors it's important we acknowledge this, challenging the rationale for our existing investments while continuing to scour the landscape for opportunities well-positioned to benefit from these trends.

Please don't hesitate to contact us if you would like to know more.

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