It’s hard to believe that it is four-and-a-half years since we all sat on our sofas and heard Boris Johnson tell us to stay in our homes.

In many ways, we are still feeling Covid’s impact, but perhaps we are finally getting to the other side of a long and complex cycle. I believe a more positive demand backdrop could await several sectors, while in others some hard medicine may need to be taken on pricing.

Early Covid success

Lockdown created a surprising number of winners. Beyond the international big-tech companies that enabled remote working, we saw companies like Halfords (HFD) in the UK – whose share price had plummeted in the initial market sell-off from Covid – suddenly bounce. Its share price rose more than five-fold in the 15 months from the beginning of April 2020. The reason? We were allowed out on our bikes and many people decided that meant replacing the old wreck buried in the garden shed.

The share price of DFS (DFS) doubled as people concluded that if – once they’d got back from their ride – they were to be trapped on their sofas, they might as well have a comfortable one.  

Markets can be (and often are) fickle. One month these companies were priced as if they were on the brink of liquidation, the next as if the spike in sales was permanent.

Next-stage winners and losers

With the introduction of vaccines and the relaxing of restrictions, another wave rippled through the economy – this one surfed by airlines, hotels and travel companies. As our focus turned again to going on holiday, these Covid losers suddenly became post-Covid winners.

In 2021 a new economic virus spread: inflation. As demand recovered, supply chains buckled under the pressure of scaling back up. Russia’s invasion of Ukraine in 2022 fanned the inflation flames further. Companies that could pass on cost pressures to their end consumers did, and prices of many goods and services rose steeply. We saw this particularly with some luxury brands and consumer staples, with material positive impacts for some on their profits and share prices.

In contrast, rising inflation – and in its wake rising interest rates – were not good for companies relying on big-ticket spending decisions. With mortgage costs rising (and the temptation elsewhere of a long-delayed holiday), spending on house extensions, refurbishments, replacement sofas and white goods was suddenly postponed.

The early Covid winners suddenly found demand at substantially below pre-Covid levels. And that is where it remains today. But that dynamic may be about to change.

The final phase?

This month’s interest rate decision from the Bank of England could prove to be an important turning point. A cut of 0.25% is not exactly rocket fuel for the UK economy, but it is a signal. Those consumers that delayed moving house, or spending on their home, may be encouraged that borrowing costs are more likely to fall than rise. Indeed, the fall in mortgage rates already put through in anticipation of falling interest rates may be having a stimulative effect on demand. Housebuilder Bellway (BWY) this month has already reported an ‘improving trading backdrop’.

The original Covid winners, many of which relied on repair, maintenance and improvement spending on the home, may have their time again, often from a cost base that in recent years has had hard discipline enforced on it.

Conversely, the more recent wave of Covid winners may be knocking up against ‘pricing fatigue’ from consumers. It was interesting to see Ryanair (0RYA) warn last month that it had to cut fares by 15% in order to attract passengers, after quarterly profits fell almost 50%. It is a sign that consumers are rebelling against businesses seen to have gone too far with price hikes.

A similar trend is being seen across some areas of consumer staples, where brands are responding with additional marketing and promotional spend to improve value (or, at least, perceived value) for the end consumer. It remains to be seen whether this will be enough to stimulate volume growth, or whether some companies will need to swallow more bitter medicine on pricing.

Not all businesses have pushed pricing too hard – the Gym Group (GYM), for example, lifted prices only modestly during Covid (to the detriment of its margins). It is only now putting through more significant rises. For consumers, many of whom are going to the gym more often than they were pre-Covid, the monthly fee still represents good value. So far, they seem prepared to swallow a price increase.

Riding the waves

What does this all mean for investors? We are still seeing the destabilising impact of Covid on sectors and individual companies. You can still surf the waves and pick up good companies at low prices, but as the economy picks up the tide may be turning. These opportunities may not be there much longer.

Laura Foll is co-manager of Henderson Opportunities (HOT ), Lowland (LWI ) and Law Debenture (LWDB ) investment trusts and the Janus Henderson UK Equity Income & Growth fund.

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