Navigating market uncertainty – the hunt for resilience

Growing sales during a recession is difficult. If the entire economy is shrinking and people's wallets are stretched, they're probably not going to buy more of your product. They might even cut down on what they're already buying.

The exception are companies that are enjoying a structural boom. Think iPhones during the financial crisis – the product was enjoying such a rapid increase in demand that Apple managed to grow sales by 93% in both 2009 and 2010 despite the global economy struggling.

Apple's performance was of course exceptional, and unlikely to be repeated. However, given the uncertainty surrounding the economy at the moment we've taken a look at some other industries that might be able to rely on structural growth in demand to support them through tough times.

This article isn't personal advice. If you're not sure if an investment is right for you, please seek advice. All investments and their income can fall as well as rise in value so you could get back less than you invest. Past performance is not a guide to the future.

Investing in individual companies isn't right for everyone. Our ideas are for people who understand the risks of investing in equities. It's higher-risk as your investment is dependent on the fate of that company – if a company fails you risk losing your whole investment.

Investors should make sure they understand the companies they're investing in, the company specific risks, and make sure any businesses they own are held as part of a diversified portfolio.

Gaming – sales surge as players switch on

Activision Blizzard

Global gaming sales are expected to rise 9.3% in 2020 – hitting $159.3bn.

That's pretty impressive at a time when many industries have been struggling to generate sales full stop, but perhaps not surprising. After all, gaming has been one of the few entertainment options available to the hundreds of millions stuck at home under lockdown rules.

However, with an estimated 2.7bn players globally, crisis-driven growth is really a continuation of existing trends.

That might come as a surprise, as gaming tends to bring to mind teenage boys with headsets crouched in front of a TV screen. In reality though, the fastest growing source of gaming revenue is from smartphone gamers. Sales made on smartphones now account for 40% of total gaming revenues, driven by regions like Middle East & Africa, Asia Pacific and Latin America.

Chart showing Global gaming players over time and by region

*estimated. Source: Newzoo 2020 Global Games Market Report, June 2020.

The increasingly diverse nature of global gaming is one reason we like Activision Blizzard. The flagship ‘Call of Duty' franchise is a jewel in its own right, and a staple in the world of console and PC gaming. However Activision also owns a stable of top flight mobile games and arguably the most successful MMORPG (or Massively Multiplayer Online Role Playing Game for the uninitiated) of all time, World of Warcraft.

Also key to the group's attractions is that, unlike some rivals, it owns its biggest brands outright. That gives it a lot of flexibility, and means it doesn't have to share success with licence holders.

The benefits of that approach are most notable in Call of Duty.

A mobile version of the game more than tripled the number of Activision players. The game's free to download, so these new players won't generate as much revenue as your run-of-the-mill console fans. But if Activision can hold onto them, they could be lucrative.

Meanwhile, Activision's answer to Fortnite's Battle Royale format, Call of Duty: Warzone, has racked up tens of millions of players in a matter of months.

Also noteworthy, a recently launched Call of Duty League looks to capitalise on success of the group's international Overwatch League and growing popularity of esports generally.

How does all this translate in Activision's numbers? Well the group has seen revenues rise 33.8% in 10 years, but earnings per share growth has averaged 12.6% a year over the period.

Significant margin improvements reflect the growing importance of higher margin digital sales. We think that's a trend that will continue, and given the strong brand portfolio the group is well placed to capitalise on market growth.

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Online shopping – all that stuff has to live somewhere

Tritax BigBox

Online shopping's been growing rapidly for years, and now accounts for almost 29% of all retail spending in the UK.

We think lockdown has accelerated this shift. Millions of us have got used to having everything from a new book to weekly groceries delivered to our doorstep.

All that stuff has to be stored somewhere, which is where Tritax BigBox comes in. The group owns and rents out ultra-large warehouses used in supply chains and logistics, and is at the heart of the UK's supply chain.

The biggest thing Tritax has in its favour is a stable of high quality tenants. The likes of Amazon, Tesco, Unilever and Ocado all count Tritax as a landlord. In fact, around half of Tritax's tenants are part of the online retail, supermarket and distribution and logistics sectors.

Supermarkets also make for reliable tenants, which gives Tritax a level of shelter even without the structural growth tailwind of increased online shopping – it takes a lot for people to stop their weekly shop.

Increasing demand for “big boxes” is being met with limited supply. There aren't many warehouses big enough or in the right locations to meet the needs of customers. That gives the group a serious competitive advantage.

Chart showing a breakdown of Tritax's annual rent

Source: Tritax Half Year Results 2020.

High calibre tenants contribute to a weighted average lease length of just over 14 years, giving Tritax visibility over future revenue. And, crucially, these blue-chip clients mean rent collection holds up incredibly well even in tough times – as seen in the current crisis. That, coupled with higher rent and additions to the property portfolio, contributed to a 24.7% rise in operating profits at the half year.

Real Estate Investment Trusts, like Tritax, have to pay out the majority of their rental income as dividends. Near-term uncertainty served up by coronavirus does mean the latest payment was reduced. However, analysts are still predicting a market-beating yield of 4.2% over the next twelve months. Please keep in mind no dividend is ever guaranteed, and that yields are variable and are not a reliable indicator of future income.

There are a couple of things to be mindful of though. Because most income gets paid out to shareholders, REIT investors should always be prepared for the possibility of dilutive share placings or equity raises. The group is also increasingly involved in development rather than simply renting warehouses. Tough economic conditions could see companies press pause on expansion, which could lower the valuation of Tritax's portfolio in the medium term.

At the time of writing, the shares trade at 22.9 times expected earnings. That's 17.5% above the long-run average.

Tritax is very well placed to capitalise on changing consumer habits, and is at the epicentre of the growing e-commerce market. Just be mindful there could be some ups and downs.

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Obesity and diabetes – growth beyond hormones

Novo Nordisk

The World Health Organisation says the prevalence of obesity almost tripled between 1975 and 2016. In 2016 over 650 million people were obese, and so were 124 million children and teenagers between the ages of 5 and 19. One of the many potential health consequences of obesity is type 2 diabetes, which can need near constant treatment with insulin.

Losing weight is really hard, and public health interventions to help have so far proved ineffective. We think it's likely obesity continues to rise, especially as poorer nations become richer and start importing more aspects of the Western diet and lifestyle. This means global demand for insulin is also likely to rise.

Chart showing prevelence of obesity in England

Source: NHS Health Survey for England 2018.

Novo Nordisk supplies nearly half of the world's insulin, alongside a suite of other diabetes and obesity treatments.

These include GLP-1 treatments, which stimulate the body to produce more insulin naturally, and weight loss drugs like Saxenda.

Thanks to tight cost control and an enviable competitive position which allows it to keep prices high, the group generates exceptionally strong operating margins, and has net cash on the balance sheet. We think reliable and growing demand should see the group flourish in the years ahead.

There are some things to keep in mind though. Insulin pricing can be a hot political issue, as some feel diabetics are being gouged for a treatment they can't do without. This makes regulation the biggest risk facing Novo Nordisk.

Another potential risk is technological disruption. Novo is on the cutting edge of diabetes and obesity research, but there's always a chance someone else discovers a treatment that makes its products obsolete. This would be unlikely to provoke an instant collapse in demand for Novo's insulin, but could damage the group's competitive position.

Overall, we think Novo is in an attractive position going forward. Demand is reliable and set to grow. As ever, there are risks – but we think the balance of probabilities weighs in the group's favour. This sort of quality doesn't come cheap though, and investors are currently asking for 22.6 times expected earnings to part with their shares.

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Price/earnings ratios for Tritax BigBox and Novo Nordisk are as at 02 October 2020.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.