Reasons for investor optimism in a post-pandemic landscape

Healthy corporations, eager consumers and reopened economies will be a powerful shot in the arm after two years of Covid-19, says Aylon Ben-Shlomo, client portfolio manager with Aristotle Capital Management.

He said he’s taking his cues from careful analysis of company health, rather than the headlines.

“There may be bumps in the road. But the consumer is healthy, many corporations are healthy, and there are reasons for optimism,” he said. “It’s easy to be skeptical but it has rarely been beneficial to doubt human innovation. Over the long run, those who have embraced innovation and optimism have been rewarded. We see this time as no different.”

Ben-Shlomo said people are focused on post-pandemic living rather than restrictions, isolation and fear.

“It seems that we as a society have already learned or are learning to live with this,” he said. “Through the miracles of modern medicine, those who want a vaccine have been able to get a vaccine. And through herd immunity, vaccination, what have you, it seems that we’re able to move forward with our lives.”

Still some headwinds

Ben-Shlomo said despite healthy corporate and personal balance sheets, government balance sheets in North America and around the world are not in great shape.

“What’s likely to continue from here is less quantitative support, less fiscal and monetary support from governments, less capital being thrown at economies,” he said.

That, combined with a full labour market where wages are rising, have created new challenges for corporations.

“Population growth in the developed world has been stagnant, to be frank. The demographics are trending older and what that means is corporations will have to be more productive,” he said. “Not to get too wonky, but if we think of the Cobb–Douglas function, there [are] three things that can drive an economy forward: more capital, more labour or more productivity.”

The Cobb–Douglas function examines the effects two or more inputs — typically physical capital and labour — have on production.

According to Ben-Shlomo, technology like cloud computing, greater digitization and 5G will continue to push the bounds of productivity and drive businesses forward.

Names he likes

In a newly reopened society, he really likes New York-based Constellation Brands Inc. It is a beer company with a near-monopoly on Mexican beer sales — brands like Corona and Modelo — in the U.S. Over the past 20 years, it has taken its share of beer sales from near zero to the mid-teens.

“And being at the premium end of things, they are able to bring consumers up and charge a little bit more,” he said. “Combine that with volume growth, and you have a wonderful cycle of top-line growth with margin expansion and free cash flow expansion.”

Another entertainment player, Sony Group Corp., is riding the wave of streaming video by supplying content to channels owned by The Walt Disney Co. and Paramount Pictures Corp. Over the next year, the top eight U.S. media companies are expected to spend north of $115 billion on new content — $150 billion if you include sports rights. Sony has plenty of content to sell and is offering it to the highest bidder. That business model removes them from the politics and potential conflicts involving Hollywood talent.

“That’s a unique way of delivering on the insatiable appetite for new content,” he said. “And they have lots of customers who are ready, willing and able to spend lots of money.”

He also likes North Carolina-based Martin Marietta Materials Inc. This aggregates company has a mini-monopoly, in a number of areas, with quarries near populated city centres. Proximity is particularly important in this business, where transportation is a key cost. And as city centres expand, housing continues to accelerate and governments pledge funds for infrastructure work, the demand for aggregates is exploding.

“Martin Marietta is a company that’s uniquely positioned to benefit from increased infrastructure spending here in the U.S.,” he said.

Choice sectors

Ben-Shlomo said he is currently bullish on alternative asset managers and private equity companies that are publicly listed.

“They have taken up more of our mindshare recently,” he said. “They’ve done quite well over the years.”

Despite the fact that these private equity funds generally have a lifespan of 10 to 12 years, they have strong customer and partner loyalty, leading to extended and profitable relationships.

“Their customers, their limited partners, end up signing up for the second, third, fourth and fifth generations of those funds,” he said. “So, it makes these capital bases nearly permanent and comes with a long tail of fairly recurring management fees.”

He also believes traditional banking will do well in an era of rising interest rates, since they can raise rates for savers.

“What we’ve seen is that low savings rates have remained very sticky at banks,” he said. “This could be quite good for the banking industry, where net interest margins can expand from their low levels today and generate further cash flows for those businesses.”

Ben-Shlomo said as economies open up, North America is in a good spot — literally.

“Our relative geographic position, with friendly borders south and north of us, having friendly waters east and west of us, somewhat insulates us from the tragic things that are going on in Eastern Europe,” he said. “North America is probably better positioned than the rest of the world in terms of future economic growth.”

He cautioned, however, that North America will still face potential supply chain disruptions and the knock-on effects of potentially higher wheat prices.

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.