Which lockdown habits could last a lifetime? - Tapping into Megatrends of Tomorrow

Prediction is very difficult, especially about the future.

Niels Bohr

This cautionary quip, attributed to Nobel Prize winning quantum physicist Niels Bohr, is applicable to anyone making forecasts, and particularly investors at this point in time.

Stock markets will continue to be buffeted by daily news flow around the pandemic. Successful investing in consumer stocks over the next couple of years, however, will depend on developing a vision of post-pandemic consumption patterns with the help of a clear framework.

Where lifestyle changes are permanent, extrapolating the trends of the past 18 months could well be fruitful. On the flipside, riding a “reversion to the mean” might be the right investment approach for those businesses poised to rebound, once restrictions are eased and where old behaviours could return.

And, of course, avoiding those stocks where the market is wrongly assuming that lockdown dynamics extend long into the future will be crucial. Here are some observations to help navigate the likely dramatic swings in the public health outlook, and within the stock market, that we may experience over the next few months.

There may be no clean breaks from the pandemic

Markets embraced the Pfizer/BioNTech vaccine efficacy announcement on 9 November 2020, with sectors and companies that had suffered most from lockdowns performing particularly well. Oil surged 8.5% and concert promoters rose as much as 24% on the day. Airlines globally embarked on a two-day rally of 15%.

The Pfizer/BioNTech news, combined with subsequent announcements from other vaccine developers, marked a massive breakthrough for the public health outlook. However, it has subsequently become clear that there will be no clean break from the pandemic, no single moment when we declare victory and return to the old normal.

New variants that reduce vaccine effectiveness are the clearest obstacle to such a scenario, but there are also issues of vaccine rollout logistics and the duration of immune response (still unknown, for obvious reasons).

It is also difficult to imagine a rapid reintegration of travel between those countries where Covid-19 has been heavily suppressed and those that are on a path to herd immunity.

Hence the scenario we have to imagine is of a gradual relaxation of restrictions, with occasional setbacks and significant variation between countries.

Short-term share price movements may be misleading

Consumer spending patterns may be quite erratic in response to the evolving environment. In particular there is likely to be significant pent-up demand for all types of experiences when restrictions are eased.

A surge in travel seems highly probable in countries where vaccine rollouts have reduced the public health risk. This surge in demand will meet reduced capacity and could drive significant price increases for flights and hotel rooms.

Likewise, if people are allowed to socialise more freely then the hospitality trade and all that goes with it (ride sharing, alcoholic beverages etc.) will likely prosper.

A leg-up in spending on experiences could crowd out spending in other areas, and therefore may give a false impression of eventual consumption patterns post-pandemic. High savings rates in countries like the US suggest more money to go round overall but there may still be some misleading short-term movements.

The market is likely to react to these moves positively and negatively. As a result, it is important for investors to have a clear vision of the long-term direction of spending patterns in order to navigate the months ahead.

Understand the factors that drive habit formation

The academic literature suggests it can take up to 254 days to form a habit (How are habits formed: Modelling habit formation in the real world. European Journal of Social Psychology. October 2010). Since most consumers have now been dealing with pandemic-related restrictions for at least that long, one might jump to the conclusion then that our new routines are here to stay.

However, there is more to habit than purely repetition over an extended period of time. Psychologists and behavioural experts also talk about a “habit loop”, which has three components:

The contextual cue

The behaviour

The reward

As the public health situation normalises, key parts of the habit loop will be broken: some of the contextual cues forced by the pandemic (home schooling etc.) will be absent. And, importantly for us, the reward may be more easily achieved via pre-pandemic behaviours.

Much has been written about how the pandemic has accelerated pre-existing trends – particularly digitisation trends like e-commerce, video conferencing, and connected gaming. Other notable changes include increased interest in health and wellbeing, scratch cooking, and investment in people’s homes.

Using the habit framework outlined above, the changes that are most likely to be “sticky” are the ones that bring a reward that can’t easily be replicated once restrictions are eased. The table below outlines our views on what this means for some of the major trends.

If investors can correctly anticipate what happens to post-pandemic behaviour, it will allow them to build “positive growth gaps” in their forecasts for companies benefiting from these trends. Equally, they’ll be able to avoid ones where the market is wrongly extrapolating ephemeral changes.

It is positive growth gaps which drive share price outperformance. If a company achieves results that are superior to those expected by consensus and those priced in by the market, then that company’s share price is likely to outperform.

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