Q&A: What does the pandemic easing mean for investors and investing moving forward?
Each month, we break down topics
related to value investing.
Have a question? Reach out to us.
What are some of the likely impacts from the pandemic fading as more vaccinations lead to more normal behavior among consumers and businesses? As the pandemic-related headwinds fade, what does that mean for investing?
The pandemic does seem to be ebbing, at least for the now. The Washington Post reports that as of June 2021, the country was averaging fewer than 16,000 new daily infections nationally, the lowest level since March 2020. As a result, the U.S. Centers for Disease Control have significantly loosened safety restrictions and recommendations for fully vaccinated citizens, and life seems to be edging closer to a pre-pandemic semblance of normal.
It’s genuinely exciting to be getting back to normal again as people get vaccinated! People are wired to be out and about, and that means there’s a lot of money that’s going to resume flowing into certain industries with reopening and post-vaccine normalization. The next two years could be very, very good in terms of all this pent-up demand being released. Plus, there's a lot of monetary and fiscal policy that has been hitting the system to boost spending even more.
But from an investment standpoint, is that enough?
I’m not sure I’m ready to make any big bets on certain industries, especially some of the industries that have been most profoundly affected by the pandemic.
For one thing, I don’t love the balance sheets you find when you look at restaurants, hotels, airlines, etc. There's a very cyclical nature to a lot of these leisure-related industries. But the pandemic has just made an iffy investment even worse because it forced a lot of them to just pile on debt. That’s how many of these industries survived the pandemic: they substituted debt for revenue.
This has significant implications post-pandemic. Excessive debt means they now need more than just a one-time reopening bump in performance, even if that bump lasts six months or longer.
There’s another dimension to this, too. My guess is that leisure travel will bounce back, but business travel likely will not return to the same degree, at least not as quickly. Unfortunately, of the two segments, business is by far the more profitable. That’s going to make it even harder for these businesses to even get as much of a reopening bump as they need, much less long-term overperformance to offset the newly acquired debt load.
Consequently, a lot of these industries that are “going to come back" are extremely vulnerable to the economy. It doesn't matter how cheap they are to buy as assets.
In fact, at the end of the day, I'd rather buy companies that I think can endure and prosper in good and bad times, and have the balance sheet, the “moat” (or circumstances that mitigate against losses and unfavorable market conditions), and the market share to do well without anything special in terms of a reopening wave to do so. That's my winning strategy.
In summary, is it enough to really allow companies the ability to repay what is essentially a wasted year, and they essentially kept themselves alive by borrowing money?
I just don't know that I want to take that risk.