Certain trends emerging in the pandemic’s wake are expected to affect businesses — and, in turn, stocks — in the longer term.
One is the implementation of cost-cutting measures, says Colum McKinley, managing director and chief investment officer for global equities at CIBC Asset Management.
“As we meet with business leaders, they’re telling us many of the cost savings they have had to enact as a result of the pandemic will be more permanent in nature,” McKinley said in a May 21 interview. “Not all of [the cost savings], but a high proportion.”
During the 2008 financial crisis, companies also acted quickly to cut costs as a way to maintain or sustain profitability, with positive results.
After the 2008 crisis, “we entered a period where net margins and return on equities for businesses rose quite meaningfully — and went to record levels,” said McKinley, who manages the CIBC Monthly Income Fund. “What we’re hearing from businesses today echoes that trend.”
He forecasted that, in three to five years, companies would generate “substantially” more cash flow than originally expected as a result of cutting costs.
Another trend is the acceleration of secular themes evident before the pandemic, such as the decline in bricks-and-mortar retailers as consumers embrace online shopping.
“It’s likely that we’re going to leapfrog and pull forward that secular trend,” McKinley said. As stores re-open, consumers will find a new balance between bricks-and-mortar and online shopping.
The evolving trend will result in uncertainty and challenges for retailers, and will also “ripple through to some of the owners of retail malls or retail physical stores, and affect those businesses,” he said.
Working from home — another trend arising from the pandemic — could also have lasting effects.
“We’re hearing many businesses tell us that, when we go back to normal, many of their employees will continue to work from home,” McKinley said.
Such a permanent shift has “broad-reaching” implications for things like transit ridership and driving, downtown office space and technology — “not only [for] the telecom providers, but [for] the software and technology [to] have the connectivity level to work effectively at home.” Related stocks will be affected in turn, he said.
After hitting market lows in March, stocks moved higher in anticipation of a recovery, reflecting the willingness of investors to look past this year’s earnings.
McKinley said investors should remain aware that the recovery is uncertain, with potential starts and stops as the economy opens in phases. He also warned of a rise in Covid-19 infections during re-opening — probably the biggest risk for investors in 2020.
“Since this is an uncharted path for us, we’re simply watching and waiting for the data,” he said, referring to economic indicators and corporate earnings.
While such indicators are expected to underwhelm in the near term, “we’re starting to look to data points that suggest the path to recovery is unfolding [in] a reasonable time frame,” he said.
Still, the recovery “will not be a quick fix,” he said. “This is not something that will be contained within a quarter.”
He expects the recovery to continue through to the end of the year. Into 2021, he said he’ll be considering businesses with “earnings power and cash flow more representative of the potential of the underlying business.”
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.