As 2020 draws to a merciful close, investors are in many cases looking past a difficult winter to what the world will be like once a Covid-19 vaccine has been widely distributed. The answers may be continuing strength from pandemic winners, and plenty of cash for shareholders.
That’s according to Huntington Private Bank Chief Investment Officer John Augustine. He spoke with Barron’s about his outlook for the market at large and for consumer stocks in particular, which have taken on greater prominence than ever during the crisis.
With a reopening unlikely until at least the second quarter of 2021 or later, he said, many consumers will have spent at least a year in some sort of lockdown. “It’s not temporary anymore,” Augustine said. “There are going to be more permanent changes on the other side of this.”
For some companies, that is good news. Augustine thinks that in terms of spending on goods rather than services, and shopping at big retailers such as
(ticker: COST) and
(TGT), consumers’ habits will linger. In addition, he said, the bump in spending on consumer staples that has already benefited that sector is likely to continue into at least the second half of next year, especially as “people cocoon in their homes a lot more.”
“It’s going to rain dividends and buybacks next year,” he said. “Dividends and buybacks have already been restarted and increasing for some companies, and while this may be more of an industrial and financial sector story, the consumer companies are still going to be involved.”
Bigger payouts will remain a welcome development, he said, especially because the Federal Reserve will likely keep interest rates ultralow next year, limiting returns on fixed-income investments.
The anticipated cash returns are due in large part to how well pandemic winners have done. The big have gotten bigger, especially in consumer stocks, a pattern Augustine likens to the banking sector in the wake of the 2008-2009 financial crisis.
That could continue, he said, if companies use their capital to pursue mergers. Augustine noted that the restaurant sector in particular looks ripe for deal making, given the disproportionate amount of financial pain smaller operators have suffered.
Investors are likely to focus on how the Covid winners are deploying their windfall for future growth, and may be impatient with those that don’t seem to be seeing the benefits accrue to the bottom line, he said.
“Next year will be all about earnings growing into stock prices,” he said, with the consumer-discretionary sector facing the highest hopes of a turnaround: Earnings per share are expected to climb 45%. He said that active managers who can pick stocks that do live up to expectations can prove their mettle versus passive investing.
A focus on earnings would be a bit of a shift from this year, when comparable-sales growth was a major focus for consumer stocks, as investors looked for clues about how well companies were holding onto their pandemic-related momentum.
Augustine noted that his firm is also predicting an increase in margins next year, as companies “realize efficiencies on the other side of the pandemic that they never knew they had.” Supply chains have had to get more efficient this year, and even while companies will face greater costs associated with rewarding front-line workers, companies that can hold onto these savings will see the benefits.
There are still some unknowns to consider, such as how the economy will look with so many small businesses permanently gone, and the continuing effect of remote schooling on the broader economy.
When things do return to “normal,” Augustine said. they will look different than they did in 2019. “There’s going to be a lot of evolution; some companies will get it right, and some won’t,” he said.
Write to Teresa Rivas at email@example.com