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To be or not to be? Health or Tourism?

 

 

The investor doubts, should we buy companies like Astrazeneca or Ryanair? Gilead Sciences or Carnival? Moderna or Booking? Roche or Dufry? Fresenius or Sixt? Grifols or Melià? Getting to the point, Health or Tourism sector? It is a question with a lot of content. On the one hand, the health sector in Europe (STXE 600 Healthcare EUR index) has risen + 3.8% so far in 2020, while the leisure and tourism sector in Europe (STXE 600 Travel & Leisure EUR index) has -32.5% drop in the same period. Companies in the health sector have generally benefited in their business results for the year 2020 due to the effect of Covid19, while those in the tourism sector have been adversely affected. Finally, an investor who decides to buy what has risen has a more trend-following type, to go with the flow, more in the short term, which is called «trend follower». Who, on the other hand, buys what has gone down has a more opportunistic look, more than taking advantage of the moment when companies quote cheap, longer term, or what is called «contrarian». This is actually the underlying dilemma. Let’s find out.

The first question to be faced is whether the Covid health crisis19 is temporary or permanent. Beyond any consideration of the many that can be done about the disease, the fact is that the Covid19 vaccine will most likely be the fastest in history. The fact that there is already a vaccine in the so-called phase III (Oxford + Astrazeneca), a dozen more in phase II (Moderna, Cansino Biologics, …), and more than a hundred more in phase I, is totally unheard of. What has been done in five months would normally have taken about five years.

In this sense, studies that had been carried out a few years ago on other types of coronaviruses, such as SARS or MERS, which certainly had much higher mortality rates than Covid19; the fact of having the genetic sequence of this coronavirus already on January 10th this year, thanks to the Chinese by the way; the avalanche of public and private financing that has been allocated given its importance; or of course the enormous 24/7 effort that many investigative teams around the world are putting into it. At the current rate, it must be assumed that the vaccine is about to be distributed during the first quarter of next year, and that, in any case, the announcement that is already ready could very well be made during the fourth quarter of this year, without ruling out that it be made public before the US presidential elections in November. The vaccine, epidemiologists say, is a definitive solution for Covid19. Therefore, treating the Covid health crisis19 as something permanent is very probably not very successful. That is, companies that have been excessively benefited in 2020 by Covid19 will lose their advantage, while those that have been harmed will recover it.

The second question is the importance of the results of a single exercise in the value of a company. The stock market usually prioritizes the business results of the current year, although the real value of a company depends on the results that the company will have throughout its life. It is evident that there are companies that will have higher business results in 2020 than they would have had without the Covid19, as it is that in others they will be much worse, since they have not been able to carry out their task normally due to global confinements.

To illustrate it, we give a real estate example, which is perhaps better understood. We assume that we own an apartment that is rented. We assume that this year, due to a series of extraordinary circumstances, we will have the apartment for many months without renting, so that with the few months of rent that we will have, expenses and little else can be met. Is it reasonable to think that, for this reason, we as owners of the apartment think about selling it for a price 40% lower than what it had before? Hardly, as long as we keep the perspective that the rest of the years we will charge a standard rent. The value of a Real Estate asset is nothing more than the present value of the clean cash flows that the property will provide to the owner for life. In other words, it is nothing other than the present value of the rents clean of expenses, net. If, as we have seen, Covid19 will be temporary, there is little point in acting as if it were permanent, until the end of time.

If this can be seen clearly in a property, why are investors who do not see it so clearly in listed companies? The value of a company is nothing more, likewise, than the present value of the future cash flows that it will achieve.

The third question is the really difficult one, since it has an unreasonable and highly emotional component. For any investor it is always easier to buy what is going up, not what is going down, even if they know inside that it will probably be less profitable in the future. If an investor, for example, has seen images on television of a cruise ship full of passengers stumbling, unable to dock, because there are some people infected with Covid19, it is very possible that they do not want to buy cruise companies. As much as the investor comes to know that the cruise reservations for the year 2021 were already in the month of May of this year higher than the cruise reservations that were for the year 2020 in May 2019, since half of the reserves that were for this year have been transferred to next year; or as much as he remembers that when he saw the images of the planes of the 9/11 towers crashing into the buildings, he said that he would never fly again, even though later he flew even more than before; Still, you hardly want to buy companies like Carnival Cruises or Norwergian Cruises. It is an almost visceral question.

The majority of the media will not help the investors much in making this decision, nor will the attitudes of many of the so-called private banks, which tend to recommend the purchase of what goes up, since they know that they will sell more, and / or the sale of what goes down, since perhaps the client thinks that they are more pending, despite being ultimately counterproductive. Likewise, investment banking will place what is in demand, what is in fashion. Without going too far in 2020, the historical record of placements of companies in the health sector in the stock markets will be broken. «You want companies in the Health sector, here you have them, as many as you want !!!» The investment banker seems to say, while his services are highly rewarded. Nor is it clear that passive management helps, which automatically buys more of what goes up and sells more of what goes down, without ever analyzing the company in question. A small investor said a few days ago that he had bought the company «X», since «the large North American asset managers had also bought» … without realizing that they were all passive management!!! Disinformation can be capital. In other words, the global nature of the system has a marked «trend follower» aspect, and few know how to overcome it.

Investing well is much more difficult than it seems. Have you resolved the doubt? I hope and wish it did.

 

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Jaume Puig CEO & CIO GVC Gaesco Gestión

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The information contained in this document refers to past returns of the Investment Funds, therefore, the client is generally warned that such references to past performance are not, and cannot be served, as a reliable indicator of possible future results. Nor as a guarantee of achieving such results.