Richard Scrope, Fund Manager, VT Tyndall Global Select Fund
“As we enter the reporting season, with the backdrop of COVID still ever present, company managements are likely to remain cautious in their outlook for 2021. The reduced visibility owing to the continued lockdowns and the depressingly slow roll-out of vaccines in Europe will continue to weigh on earnings. The difference to last year, however, is that many companies have undergone significant restructuring and rightsizing since the start of the pandemic and are now better positioned, and most importantly better capitalised, to see their way through to the pastures beyond.
“Since the nadir of Q1 last year, European equities have seen sequential earnings improvement, and early indications of Q4 2020 showed that once restrictions were lifted, consumers were willing to return to offline purchasing. We expect that the online purchasing culture, that was boosted in 2020, will remain elevated as last year merely served to pull forward a trend that was already in place. Therefore, companies that have digital platforms in place will have thrived in 2020 and will be better positioned for the coming year. 2020 was a year where, to paraphrase the CEO of Nike, the strong companies became stronger.
“Raw material price inflation and the strength of the Euro will impact the earnings season, therefore those companies that have put in place the correct hedging strategies or have cost base locations matching their sales will prosper. For sectors such as Materials and Energy, there may well be tailwinds from improving raw material and energy costs, even if demand remains sluggish in returning. Industrial Europe is disproportionately exposed to Asian demand, and thus with the growth numbers and data coming from the Chinese ports, we expect that they too will have shown improved demand through Q4 and into 2021.
“With the inventory destocking undertaken last year, working capital should be positive for most companies. The coming year may well see some inflationary forces as demand and supply are temporarily mismatched when the end markets pick up. We expect that those companies that continued to invest throughout 2020 will have been able to gain market share and therefore likely to post very robust operating profits. We expect that equity markets will look beyond the current lockdowns, and positive catalysts such as the European Green Deal will continue to be a focus for capital investment.”