The 2020 pandemic forced businesses to radically adjust to lockdowns, restrictions on travel, and the sharpest economic downturn for a century. While there were a ‘lucky few’ technology and healthcare businesses who benefitted (think: Zoom, Netflix, Moderna for example), the vast majority of the economy suffered from an unprecedented downturn.
This forced the corporate sector to learn very quickly, to adapt to the new normal to survive, and in many cases figure out how to continue operating on a much lower cost basis.
As quickly as the pandemic shocked the global economy, the arrival of effective vaccines brought economic activity back faster than many had expected.
Businesses the world over, large and small, who had adapted their cost structures to cope with the pandemic are now having to adapt the other way, to a quick recovery… no wonder we’re seeing supply shortages!
An underappreciated aspect to this story of the past 18 months for investors is that many businesses today have more efficient cost structures than before the pandemic. Simply put: they had to adapt to survive last year, and now demand is recovering, they should be able to keep many of those hard-won efficiencies going forward.
So far in 2021, the first and second quarters (Q1 and Q2) of the year have been defined by much stronger than expected corporate profit growth. Despite the spectre of higher inflation and slowing GDP growth rates in China this quarter (Q3 – reporting of which started last week), we believe Q3 corporate profit results could beat expectations once again, as could results for Q4 and early 2022. This would be because corporate margin profiles are now structurally higher vs. pre-pandemic.
High quality, listed stocks who have successfully navigated the pandemic could very likely offer much stronger profit growth potential in the short- and medium-term than the market currently expects… and that certainly bodes well for the share prices in those stocks!
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