Recently I’ve been asked why, in the current environment, I still own Airbus.1 And the answer is simple: I’m not investing for today but for two and three years from now and beyond. Using Airbus as an example, here’s what I mean by that.
As an aircraft manufacturer, Airbus is a company driven by the structural trend of growing air travel, particularly in emerging markets. And, as a member of an industrial duopoly with extremely high entry barriers, it is well-positioned to monetize — especially since the other half of that duopoly has weakened significantly. Airbus’s competitor Boeing2 appears to have some way to go before it can obtain recertification for the 737 Max to compete in the wide-body, long-range jet market. Boeing’s weak balance sheet has forced it to call off its acquisition of Embraer, the maker of single-aisle, narrow-body jets, hobbling its competitive position in the regional travel market. As a result, Airbus’s share of each market has the potential to increase significantly. And with roughly $30 billion in liquidity, Airbus is able to withstand the $8 billion cash flow drain we expect this year — and perhaps the next two after that — until airlines begin buying planes again. Clearly, I expect people to resume flying.
I expect trends to continue as people adapt to change
There are two reasons for my optimism: Humanity’s problem-solving ability and our basic nature. People are good at solving problems. It’s what we do. There is a tremendous amount of problem-solving effort going into finding drug treatments and vaccines for this coronavirus, and I’ll be surprised if we haven’t come up with increasingly effective solutions by this time next year and the year after. We are also highly adaptive, as I learned near the beginning of my career.
As a young analyst, I was covering the cruise industry when I put a buy on Royal Caribbean right before I left the office to go on vacation and get married. As I was landing in Bali on my honeymoon, I learned of the 9/11 attack in the United States. Along with my other feelings, I had a very bad feeling about my recommendation. At the time, the idea that people would be willing to travel for leisure — let alone get on an airplane in the United States to go to a boat to take a cruise — well, let’s just say it seemed unlikely. But in our subsequent discussions, Royal Caribbean’s CFO said something I’ve never forgotten. She told me that in their first post-attack cruise ticket sale, they discounted the tickets steeply, and they saw an immediate response. She said to me, “We priced fear that day.“
We’re seeing the same thing today. Disney, another company I own,3 re-opened Shanghai Disneyland at 30% capacity on May 11. A week’s worth of tickets sold out within hours; a week later, the same thing happened. Carnival4 will launch eight ships on cruises on Aug. 1, and I’m curious to see what the ticket sales will be. (I don’t own Carnival because of its low liquidity. In my opinion, the price Carnival will have to pay for the capital needed to operate through this situation will be so high that little value will be left to current shareholders.)
My point here is that people adapt. In my view, this coronavirus event will not change basic trends. It may delay some of them, such as the growth in air travel that we’ve just discussed. It may accelerate others that we’re invested in.
For instance, I expect a higher portion of the workforce to work “remotely,” a higher percentage of retail purchases to be done online, and contactless payment to grow at a faster rate now. The rising use of data in medical diagnostics and treatment development has just gotten a push. All of which will drive the need for more data center capacity and semi-conductor chips. These are just a few examples of trends that were in place before this event and are being accelerated by it. The direction in which the world is moving remains clear.
COVID-19 is one of the “black swan,“ “once in a century” events that have happened every 10 to 12 years in my career. I suspect they’ve happened every 10 to 12 years in every investor‘s career. When they do, the market convulses, correlations go to one, and attention is naturally focused on the very short term. For an operating manager or a short-term trader, that is appropriate. But for an investor, I believe the focus should remain on fundamental structural trends. Events can slow them or accelerate them, but the trends remain the same. The key questions for an investor also remain the same before, during and after such events: which companies are advantaged by the world’s long-term structural trends and do they have the financial strength to withstand the shocks that are inevitable?
1 Airbus was 2.40% of Invesco Oppenheimer Global Fund total net assets, as of April 30, 2020
2 Boeing was not a holding of Invesco Oppenheimer Global Fund, as of April 30, 2020
3 Disney was 1.66% of Invesco Oppenheimer Global Fund total net assets, as of April 30, 2020
4 Carnival was not a holding of Invesco Oppenheimer Global Fund, as of April 30, 2020
Blog header image: Leandro Crespi Studio / Stocksy
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.
The Invesco Oppenheimer Global Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund.
The opinions referenced above are those of the author as of June 16, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.