Who will be the winners from the UK’s lockdown lifting?
The UK continues its steady emergence from lockdown. Shops, gyms and outdoor hospitality reopened in April, with hotels, cinemas and indoor dining now following suit. All being well, further restrictions could be lifted in June.
The lockdowns of the last year have undoubtedly benefited online grocers and food delivery services. But we’ve reached a crucial moment for the economy and for companies. This is the moment where we find out the extent of “pandemic fatigue” and the degree to which consumers are willing to get out and spend.
So far, the signs look very encouraging. Anyone trying to make a last-minute restaurant or pub booking for the early May bank holiday weekend would likely have been disappointed. Anecdotally, tables seem to be booked solid despite the changeable spring weather.
It’s a similar story for fitness firms. Early media reports from the UK’s largest low-cost gym chain pointed to over one million member workouts in the week after the 12 April reopening, a similar level to the same week in 2019.
The pandemic has created severe short-term challenges for the economy but in doing so it has tested business models and allowed those with the strongest long-term potential to shine through. Investors can take advantage of this moment of clarity.
Pent-up demand within the hospitality sector
Hospitality should be an important beneficiary of pent-up demand as people start to socialise again. However, lockdowns posed an extreme challenge for the sector. Companies who are financially strong, with premises in the best locations, are likely to be the most attractive potential investment opportunities.
For example, City Pub Group runs pubs in London, cathedral cities and market towns. It owns the majority of these premises, offering a degree of security and the potential to raise finance based on these real estate assets.
The hotel industry is another that should benefit from reopening, although this could be at a slower pace, as travel for business purposes in particular may take longer to recover if working from home remains the norm.
Nonetheless, we think overall appetite for travel remains strong, especially after a year when people were largely confined to their immediate surroundings. There is enormous scope for a bounce back. The latest figures from Visit England for February 2021 showed that the hotel occupancy rate was 29%, compared to 73% in February 2019.
Dalata Hotels Group is an example of a hotelier with a strong portfolio of hotels across the UK and Ireland, that could benefit from the reopening of both economies.
As well as the boost from activity resuming, companies in the hospitality sector who are financially robust may also have scope to expand by buying up sites from weaker competitors who have been forced to exit the market.
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Time to travel
The reopening of travel channels should also mean higher passenger numbers on the UK’s train and bus networks. Rail bookings picked up last summer when lockdowns eased and we would expect a more significant rebound this year, assuming the UK government’s reopening plan proceeds as planned.
Trainline is a UK-listed technology platform that enables users to search and book rail tickets, both in the UK and increasingly across continental Europe too. For such platform companies, very little extra investment is needed for additional customers, which we believe subsequently drives profits and generates returns.
Meanwhile, a rebound in travel should be good news for catering outlets supplying food on the move. SSP Group operates outlets that may be familiar to the UK travelling public, such as Millie’s Cookies and Upper Crust. The company has sought fresh equity and refinanced its debt in order to weather the protracted lockdowns of the past year.
We believe equity investors can play an important role in the overall health of the UK economy by participating in equity raises. These raises are designed to ensure companies with bright future prospects are still in business to profit from the return of customers when the rules allow.
Focus on fitness
Health and wellness trends have grown in prominence over recent years and the pandemic has starkly highlighted the importance of good health. Gyms are already allowed to open part of their operations and, anecdotally, are seeing buoyant demand.
From an investment standpoint, gym operators offering low cost, no-contract, memberships are likely to find it easier to regain customers than those requiring people to sign up to lengthy contracts. The Gym Group is one such operator with low cost subscriptions.
Challenges remain in retail
Some retail companies with predominantly leasehold brick and mortar business models and weak balance sheets were under significant pressure prior to the pandemic.
In the short term we believe we may see footfall increasing as a result of the reopening, but the fundamental challenges facing the UK high street pre-date the pandemic and are unlikely to go away, in our view. Our belief is that those companies that do not improve sales densities and fail to successfully implement and scale online offerings could continue to struggle in the long term.
Growth not confined to reopening themes
The above gives a flavour of some of the diverse investment opportunities directly connected to the current lockdown lifting phase. However, these kinds of consumer-oriented industries are not the only areas that can benefit from the UK’s economic expansion.
For investors in small and midcap companies, we see a wide range of opportunities across different UK industries, including technology, industry and construction. Government initiatives to stimulate housing market activity should stand industrial and construction companies in good stead.
For more on these themes, please see How can investors access the UK’s industrial recovery?
This article was published on 24 May 2021. Any company references are for illustrative purposes only and are not a recommendation to buy and/or sell, or an opinion as to the value of that company’s shares.
The article is not intended to provide, and should not be relied on, for investment advice or research.
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