Waiting On a Recovery That’s Already Priced In

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Murdo MacLean

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This interview was recorded on Dec. 17, 2020

Text transcript

My name is Murdo MacLean. I’m a client investment manager at Walter Scott and Partners.

In many ways, the outlook for 2021 is the same as any other year from a Walter Scott perspective in that what we know for sure is that things that we do not expect or do not factor in yet will undoubtedly happen over the course of the year. We have some clues, to the extent that 2020 has obviously been a significant year in terms of the coronavirus and the impact on the economy around the world that we’ve seen. So, there will be a continuation clearly of that. That being said, I think markets have already begun to price in, to some considerable extent, a recovery from that.

So where do markets end up in a year such as 2020 when markets are looking like they’re going to end up in solidly positive territory? What does that mean for next year? It’s difficult to say. I think we don’t try to make predictions at Walter Scott about the direction of markets, but we are very, very bullish on the portfolios that we manage, both global and international as being the sort of flagship strategies that we manage. The prospects for businesses that have been, I would say, boosted by some of the changes to do with coronavirus, i.e, the acceleration in certain trends — whether that be working from home, whether that be utilizing technology more in daily life, whether that be transacting more in non-cash-based payments rather than cash. There’s lots of things and trends that have accelerated this year. And that’s been to the benefit of a number of companies in the portfolio.

At the same time, there are obviously companies in the portfolio that would prefer things to be more normal. So, there are companies in the portfolio, whether they be retailers such as TJX that manage the TJ Maxx brand over here [in Europe], Winners, Marshalls and so on, or Inditex that manages the Zara brand and a number of other sub-brands. These retailers certainly are looking forward to the time when they can open their stores fully, and people can shop again in a normal way.

In the meantime, their online presence has allowed them to be very nimble and we see a significant recovery in their business in the second half, and indeed the share price. So there are elements of the portfolio that we would expect to continue to enjoy a very healthy momentum, and there are other elements of the portfolio — in that consumer space, for example — where we would expect a resumption of more normal trading conditions, and that will see them potentially be among the better performers in the portfolio.

Beyond that, I think it’s very difficult to say what to expect. I think our approach is such that for the past 35 years, we’re firmly of the belief that by buying great businesses that analyze well from a track record, that have very strong, resilient, differentiated business models, that have the balance sheet and the cash-flow dynamics that can continue to invest in their businesses, even when times are tough, as they have been. And then, all importantly, paying an appropriate valuation for that group. So, having valuation discipline, which counts, in our view, at all points in the cycle, not just in the tougher periods.

That is the best approach to growing client money. We do this with a view over the long-term to do that.

I think it’s an easy trap to fall into to assume that once coronavirus is dealt with, we can all get back to happy days again. There’s going to be other challenges. Based here in the U.K., Brexit clearly continues to rage on. So, steering a safe path through all of that is best done, in our view, as I say, by being invested in what we consider to be amongst the very best businesses around the world, and by maintaining vigilance around valuation.

I suppose the other aspect that as we head into 2021 is only likely to get more attention is that of ESG considerations — environmental, social, and government. At Walter Scott, this is something that we’ve been integrating into our research approach really from the start, in that, as long-term investors getting to know the business that you’re investing your client’s assets in and understanding whether they are a good corporate citizen or otherwise, is really part and parcel of the job. It goes alongside all the other analysis that you do.

So, I very much think this is a concept that is only going to continue to gain attention for us. It’s great, because I think again, it shines a light on the quality of the businesses. For the first time or increasingly so, efforts that we’ve been making for years to invest in well-run businesses with proper governance structures might actually be rewarded by the market. And I think that’s a real positive for us, for investors, for those that will be paying attention to this in the future.

So, certainly an area that we’ll continue to ramp up in 2021 and beyond, I think that can only be positive for all participants in the investment community.