Ramiz Chelat, co-portfolio manager of the Virtus Vontobel Global Opportunities Fund, explores companies benefiting from the shift to working from home and e-commerce.
Key highlights discussed:
- As COVID-19 cases increase, governments will concentrate on localized lockdowns. This should result in less economic damage but will delay the recovery. Investors also want to see how consumption holds up as stimulus measures roll off in the U.S. and Europe. While investors are focused on the development of a vaccine, concerns remain around its efficacy and availability.
- In the technology sector, certain e-commerce, online gaming, and cloud computing companies have benefited from the impact of COVID and have seen earnings upgrades. However, multiples in some tech names have expanded somewhat ahead of earnings upgrades while the extent of the online trend’s reversal post-COVID is unknown.
- Investors should look for companies with proven and repeatable models and established market-leading positions. It is also important to focus on companies that generate high returns on invested capital from their core business, while also investing in new areas that can generate incremental value over the mid to long-term. For example, e-commerce is a strong structural theme in China, where penetration is roughly 25%. Alibaba is a leading player with 60% market share despite competition. It has an advantage due to its number of merchants and product selection, and its return on invested capital overall is 20% despite new investments.
- In our view, investors have not fully appreciated the long-term benefits that some leading retailers will see from the shift to e-commerce. Some dominant retailers have invested in omni-channel, which integrates their physical stores into their e-commerce businesses. This has resulted in potentially higher gross margins and lower operating costs from e-commerce as orders can be filled from stores. For example, Nike recently indicated that gross margins on e-commerce were 10% higher than wholesale.
- IT services and BPO (business process outsourcing) companies are adjusting their cost bases due to employees working from home. For example, Teleperformance, which provides outsourced call centers for corporates, successfully shifted roughly 80% of its employees to working from home during the pandemic and now has a long-term goal for 40-50% of staff to work from home. We feel that this has clear implications for leasing space and capital expenditures.
The commentary is the opinion of Vontobel Asset Management. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Opinions represented are subject to change and should not be considered investment advice or an offer of securities.
Past performance is no guarantee of future results.
All investments carry a certain degree of risk, including possible loss of principal.
Important Risk Considerations:
Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk. Foreign & Emerging Markets: Investing internationally, especially in emerging markets, involves additional risks such as currency, political, accounting, economic, and market risk. Market Volatility: Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issue, recessions, or other events could have a significant impact on the portfolio and its investments, including hampering the ability of the portfolio manager(s) to invest the portfolio’s assets as intended. Prospectus: For additional information on risks, please see the fund’s prospectus.