Pfizer’s vaccine announcement sent investors hurrying back to depressed value stocks and has led many to wonder whether 2021 will herald the much-anticipated turning point, where value-investing makes a return as a successful strategy. There are strong reasons for thinking this will not be the case, and that investors in struggling sectors are in for a big disappointment as the Covid-19 recovery turns out to be K-shaped. 
A K-shaped recovery would see Covid-19 accentuate pre-existing trends, boosting quality names in online and digital services as well as certain retail names, which are already performing well, while sectors of the economy already struggling, such as traditional banking and brick and mortar retail, will only struggle even more.
The current downturn is the result of a highly unusual cause: a virus pandemic. As a consequence, the recovery is liable to be rather atypical. The short-term bounce back to the real economy will likely be much steeper than previous recoveries. Anticipation of this is a reasonable explanation for the rotation of equity investors into value stocks. However, this strong bounce-back shouldn’t lead us to believe that the year ahead will be a typical mean reversion cyclical recovery which we are used to from previous cycles. On the contrary, it is likely that the recovery will be as atypical as the reasons for the outbreak.
The main reason to suspect we will see a K-shaped recovery is the fact that many value sectors are structurally challenged over the long term and a short-term, vaccine-induced uptick in confidence will not fundamentally alter this. Successful new entrants in the form of Tesla and technological disruption with the change from combustion to electric vehicles pose big challenges to the automotive sector. The banking sector also faces a struggle, including tougher regulation, a 0 per cent interest environment, a flat yield curve and competition from fintechs.
It is unlikely that we will experience a ‘return to normality’ but rather a ‘return to new normality’ with online services making further inroads in all parts of our life, a trend which has been exacerbated but not caused by the pandemic.
In Europe this could mean a focus on companies like Adyen, the Dutch e-commerce company and fintech leader which specialises in providing online payment services for businesses. Adyen is one of the most dynamic companies in the space, with its prospects boosted by Covid-19. It processes payments for the likes of Netflix, Spotify, eBay and has built a powerful and scalable private cloud infrastructure unmatched by any bank.
However, you don’t need to be a pure-play online services provider to have excellent long-term prospects. The pandemic has also sped up digitalisation in traditional sectors. Retailers who combine a strong brand with efforts to exploit digital channels and access solutions companies taking advantage of new trends are set to outperform and populate the upper arm of the ‘K.’
Take for example Inditex. The fast-fashion behemoth recently announced that close to 40 per cent of its investments until 2024 will be spent on digital infrastructure while for the first time in its history the company is closing brick and mortar space. The reason? A marked acceleration in online sales during the lockdown, which just accelerated further when stores reopened. The company is betting this dynamic is here to stay and wants to prepare accordingly.
Another example is L’Oreal, which has pioneered a new augmented reality technology known as Modiface that allows users to apply makeup to a virtual version of their face. This serves to strengthen their ties with consumers and reinforces their brand. The company estimates that 50 per cent of its growth drivers are digital. This is a powerful combination of an old and established brand franchise and new digital channels.
An access solutions company, Assa Abloy, which produces locks, doors, gates and other entrance devices is taking advantage of recent trends. During the pandemic people have spent more time at home and consequently have given more thought to home improvements. The result has been an uptick in demand for the company’s digital door locks. The increase in business is unlikely to subside after Covid-19 as recent years have seen a growing trend towards touchless solutions and automatic doors in offices, which Assa Abloy also provides.
This is an uncertain time and the vaccine news has led some to suspect a fundamental reorientation in the market. Our view is that this is unlikely to be correct — whatever the short-term boost in investor confidence, you can’t vaccinate the automobile and traditional banking industries from the long-term structural challenges they face. We believe that investors should instead look to those companies set to increase their advantages over the coming years by capitalising on the ongoing shift to digital and online services.
Alistair Wittet is portfolio manager of the Comgest Growth Europe fund. The views expressed above are his own and should not be taken as investment advice.