With the development of several vaccines, light is visible at the end of the pandemic tunnel. Should investors now invest in COVID-19 losers? And if so, what should be considered? We present thoughts on gastronomy, vaccines and the length of time until normal operation can start. Finally, we deal with the characterisation of promising investments.


Particularly negatively affected sectors

The lockdown measures taken to combat the COVID-19 pandemic have had a devastating effect on restaurants, hotels, airlines and the tourism industry in general, but also on the oil, entertainment (such as fun parks) and aircraft industries worldwide.


A brief analysis of the restaurant industry

A small number of “hospitality providers” were able to compensate for a small part of the lost turnover by switching to takeaway and food delivery. However, many rather high-priced restaurants were denied this option.

Especially in the hard-hit countries Great Britain, Spain and Italy, a mass death of restaurants could result despite the vaccines. Industry experts estimate that up to a third of all restaurants are unlikely to escape insolvency in the coming months.

The fate of many companies will depend on when exactly normal operations can be resumed.

In the UK, the first vaccine has already been approved and vaccinations will start “immediately”. The prospects are therefore good that “normal operations” in restaurants can be resumed by mid 2021 at the latest, possibly as early as spring.

The decisive factor here will be whether the minimum distances can be reduced so that supply capacity is no longer restricted. With a minimum distance of 2 meters, many restaurants will no longer be able to achieve the old profitability, as they will only be able to operate at 35%-50% capacity. Opening hours are equally important. Bars, in particular, have difficulty in being profitable if opening hours remain restricted. Opening for a limited time is not enough to generate the necessary turnover.


Crisis could also create opportunities for investors

What are the opportunities in the crisis for investors? It is likely that supply capacity in the hospitality industry will shrink significantly due to market exits in most European and American countries, less so in Asia.

At the same time, consumers are expected to catch up once the lockdowns are finally over. All data indicate that in 2020 consumers consumed where it was possible. Instead of going on a summer holiday (and the actual upcoming winter holiday), instead of going to a restaurant, the cinema or dancing lessons, physical consumer goods such as consumer electronics and clothes were bought (online). Parts of the consumer goods industry even managed to increase their sales significantly compared to the pre-COVID 19 eras. There is therefore a great deal of catching up to do in the service sector, which is likely to be unloaded as soon as the pandemic appears to have been “defeated”. These statements are supported by the following 2 charts. It is clearly shown that US consumers restricted their consumption of services more than their consumption of goods during the lockdowns of the first wave of infection (chart 1).

Chart 1: US personal consumption expenditure in billions of US dollars

US personal consumption expenditure in billions of US dollars
Source: Refinitive Datastream


Precisely because of the difficulty of “making themselves happy” by consuming services, consumers have tried to do so by buying consumer goods instead, “as never before” (chart 2). A large part of this is probably due to online shopping.

Chart 2: Personal goods consumption USA in billions of US dollars

Personal goods consumption USA in billions of US dollars
Source: Refinitive Datastream


Significant pent-up demand in services consumption after the end of the lockdowns

Thus, an at least temporary increase in demand is likely to meet with a reduction in supply. Of course, this statement does not only apply to the hotel and restaurant industry, but also to the hotel sector and the airline and travel industry. Ask yourself how much you are prepared to spend for the next holidays if you can travel to the summer holidays again with as little risk as possible or take a “spontaneous long-distance trip”. To put the question more locally, ask yourself whether you are diagnosing a backlog of demand for yourself and, once the pandemic is finally defeated, instead of buying goods, you would rather go up the Titlis again, have a really good meal and treat yourself to a great long-distance trip or at least go to a thermal spa with great slides again.

How could an investor take advantage of a foreseeable return to normality? Measured against a pandemic-free world that has found its way back to normality, many companies are favorably valued, even after the price rises in recent weeks since the positive news on the vaccination front. This is of course true if one assumes that these companies will survive the looming “hard winter” by a wide margin and that shareholders will not be too heavily (preferably not at all) diluted in the meantime.


An analysis of the upcoming vaccinations

First, an analysis of the vaccines: It is likely that the first large-scale vaccinations will begin in a few days. Large-scale vaccination is expected to be carried out by mid 2021 or 4th quarter 2021. At the current infection rates, the very high vaccination coverage of 95% (if this figure is confirmed) means that “only” about 65% of the population would need to be vaccinated in order to avert the risk of a pandemic and end or relax the lockdown measures. How is this figure calculated? Assuming that every COVID-19 infected person without lockdown measures infects an average of three people, once vaccinated they would only infect one person on average if 2/3 of all people are immune. Assuming that 5% of the population are already immune (because they already had the disease) and that the probability of getting the disease despite vaccination is 5%, the number x (how many % must be vaccinated) can be calculated as follows

x times 0.95 + 0.05 must be slightly greater than “two thirds” (result: 0.65)

In other words, if 35% of the population were “vaccination refusers”, the risk of a pandemic would still be averted after 65% of the population has undergone successful vaccination. Presumably, therefore, there would be no need to introduce compulsory vaccination. The euphoria of the markets is therefore quite understandable, provided that the effectiveness of the vaccines is confirmed.


Financially weaker companies threaten bankruptcy despite the foreseeable end of the pandemic

However, as the time to resume normal operations could last between 3-9 months, the weaker ones will not survive or will only survive if they carry out capital increases at bad conditions.


Investing in the financially strong within the problem sectors

A promising investment strategy could therefore be formulated as follows:

It is advisable to invest part of one’s assets in companies in problem industries that have been particularly badly affected by the pandemic. However, investments should be concentrated on the better 2/3 of the firms in the sector concerned, measured in terms of creditworthiness.

Of course, the potential for recovery is much greater among the problem candidates, but the risk/reward ratio is likely to be rather unfavorable. In addition, there is a chance that “the healthy”, the “credit troubled” ones will be able to buy up at favorable conditions.



This post was automatically translated

Thomas Härter
Chief Investment Officer Aquila