Companies including Compass Group, Flutter Entertainment and Whitbread (which owns a suite of brands including Premier Inn) are taking advantage of calmer markets in order to issue equity to shore up their balance sheets. We are pleased to see equity-holders pay up to help out their more risk averse bondholder cousins. An injection of fresh equity helps reduce the solvency risks and reassures the bond investors.
EasyJet plans to cut up to 30% of its workforce, comprising of up to 4,500 jobs. Interestingly, they also plan to cut their fleet size by 51 jets before the end of 2021. As the aircraft industry as a whole reduces the number of planes it operates, that supply shrinkage will help the industry push through price increases to recover some of their recent losses when the global population starts travelling again. These market dynamics are indicative of some of the inflationary pressure markets will face as they start returning to normality.
One look at the +21.8% year-to-date gold price is enough to demonstrate just how keen investors have been to hide away in safe assets since this crisis began. The effect of this flight to safety has stretched the valuations of defensive companies as investors have been willing to pay up for shelter from the storm. As markets continue to tick upwards, it seems that investors are now starting to look elsewhere. This week, some of the more beaten up shares and cyclical value stocks have benefited from a newly invigorated interest. Just because investors have become more comfortable owning cyclical assets, that doesn’t mean that the road ahead has suddenly become any shorter or easier to navigate.
This is to say that investors need to be very selective as they turn their attention towards these assets. Some of these stocks were undoubtedly treated unfairly in the sell-offs and deserve to rally back. For example, Intercontinental Hotels Group is an example of a great business which investors can now buy at an attractive price. When all this washes through, its strong position – both financially and within its competitive landscape – will enable the company to reopen its hotels and grow from there.
For those companies which have had to go hat-in-hand to investors for help repairing their shabby balance sheets, a strong rally doesn’t make much sense. A significant fall in the price of an asset doesn’t necessarily mean that it’s become good value. Some of these price drops are representative of a real loss of value which can be damaging to investors who forget that cheap does not necessarily mean good value. We continue to conduct extensive analysis looking for those businesses which have been unfairly treated and which we are confident can return to their pre-crisis positions.
Quote of the week
"In realistic terms, a person cannot suddenly disappear and reappear by folding space.” The Rodong Sinmun, North Korea’s official national newspaper.
Perhaps you’re wondering why anyone ever felt the need to write this sentence down. It might seem about as insightful as pointing out that a person cannot fly or turn invisible. Things are a little different in North Korea. The country’s regime has finally admitted that Kim Jong-un cannot magically bend time and space to teleport himself, putting to bed a long tradition used to idolise the mystical powers of Kim Jong-un and his father Kim Jong-il. For years Pyongyang has claimed that the Kim family are masters of “chukjibeop”, a method of folding space and travelling great distances in a short space of time. We just hope that after all these years, you don’t feel too betrayed.
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.