December 2020

December 3, 2020

Fuelled rather than deterred by the disruption and uncertainty of Covid-19, the Advisory Panel conducted its second remote meeting in December.

The disruption caused by the pandemic has produced plenty of talking points and diverse opinions as to where the best opportunities might be.  Central to this was a discussion as to which radical changes the world has undergone have been permanent, and which changes have been temporary.  Permanent changes to an operating environment create the mirage of a value opportunity (or a “value trap”, where a price fall accurately reflects the change in the likely fortunes of a company), whereas temporary changes create genuine value opportunities (where price moves reflect the short term position, and under-value the long term opportunity).  Companies in this second group are likely to experience the “holy grail” of compounding price increases with volume increases as the market recovers.  Identifying these opportunities before the rest of the market remains the challenge facing all investors.

Here are a few ideas that the panel discussed: the UK has had a difficult time through the pandemic, with Brexit adding to the uncertainty, but as one of the least loved major stock markets it looks inexpensive; housebuilders were mentioned as a possible source of opportunity, especially if there continues to be pent up demand and high savings across the population; banks, airlines and pubs (at least those that survive) also look interesting as areas that have suffered, but are likely to remain relevant regardless of how the pandemic is resolved.

This led on to one of the most important issues for global markets: the possible return of inflation.  Most economists have so far thought that a significant rise in inflation is at best a distant possibility, having laid dormant for so long.  Governments’ increased activity – in the markets, in the monetary system, in the size of central banks’ balance sheets, and in directing and guaranteeing lending through the commercial banks – means that times may be changing.  The Barber Boom of the early 1970’s might be an interesting case study for the future.  Most on the Panel agreed that it is certainly worth being prepared – holding some assets that will thrive in an inflationary environment.

Peter Hollis, Russell Napier, Angus Tulloch, Ally McKinnon, Glen Finegan and the Kennox investment team.

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