The stock market’s recent performance suggests that investors are looking ahead to a reopening of the world economy. The FTSE 100 has surged nearly 20% in the past four months, as vaccine rollouts indicate that operating conditions will improve for many businesses.
This could be good news for global consumer-focused companies such as Unilever (LON:ULVR) and InterContinental Hotels (LON:IHG). Their performances have been disrupted by the Covid-19 pandemic in the past year. However, they could offer investment appeal in an improving global economic outlook.
A difficult year
The tough operating conditions experienced by IHG and Unilever in the past year have largely been caused by lockdown measures that have changed consumer spending habits.
For Unilever, demand for out-of-home and beauty products has come under pressure. Although this was offset by higher sales for its retail foods and hygiene brands, as consumers shifted spending to at-home products, the company’s underlying operating profit fell by 5.8% in 2020.
Lockdown measures had an even greater impact on IHG’s financial performance. Its revenue per available room (RevPAR) declined by 52% in 2020, as a large number of its hotels were closed for a substantial part of the year. This resulted in a £109m operating loss compared to a £450m operating profit in the previous year.
Improving trading conditions
Looking ahead, the world economy is widely expected to bounce back in 2021. Having declined in size by around 4.4% in 2020, it is forecast to grow by 5.2% in 2021, according to the IMF. It expects this to be followed by growth of 4.2% next year, as vaccine rollouts lead to fewer containment measures being required.
This could stimulate the performances of Unilever and IHG. Both companies appear to have sound strategies and market positions through which to capitalise on an improving economic outlook.
For example, Unilever intends to increase its exposure to India, China and US markets. It has significant competitive advantages in these countries, which could allow it to maximise sales and margins in future. It also intends to pivot its portfolio to areas where it has strong market positions. Meanwhile, e-commerce sales provide the opportunity to develop stronger customer loyalty, as well as higher revenue visibility through subscription models.
IHG appears to have the financial standing to survive what may yet be a turbulent 2021. The company reduced costs by £107m in 2020, and finished the year with £1.5bn in total liquidity. Despite a very disappointing year, it has continued to invest in its global pipeline of new rooms. It has an 11% share of the industry pipeline, which could expand its presence during a period of improving economic performance.
Of course, the world economy is likely to experience periods of uncertainty and volatility in future. Therefore, IHG and Unilever may not deliver a smooth road to recovery. However, with their shares currently trading below their five-year highs and improving trading conditions likely to be ahead, they may offer investment appeal as Covid-19 lockdown measures become less prevalent.