Holly Black: Welcome to Morningstar. I'm Holly Black with me is Alex Morozov, he's Director of Equity Research at Morningstar.
Hello.
Alex Morozov: Hi, Holly. Good to be here.
Black: So, Alex, for equity investors, such as yourself and equity analysts, 2020 was obviously a bit of a roller coaster ride on the stock market. What are some of the things on your mind as we go into the new year?
Morozov: Yeah, Holly so obviously, the epidemic changed a lot of behaviours. Changed a lot of habits that a lot of consumers have. So for us as analysts we need to try to figure out how many of those behavioural changes have staying power. So looking through some elements of habit change, new habits that have formed, how many of those new habits will persist once perhaps vaccine is out, and everybody starts feeling safe to go. So, what we are trying to do is we are trying to assess some of the structural changes that we've seen in the marketplace, for example, things like what we call sunk costs, so some of those costs that have incurred during a pandemic that could change the long term economic calculus of consumers and firms. So I'll give you an example. A lot of firms have made investments in the working from home capabilities. So how does that, how do those working from home trends change once the pandemic is over? We anticipate given that many of us now have much better equipment, much better setup at home, we will probably be less reluctant to work from home more frequently than we have in the past. So those are the factors that we have to consider when we're trying to assess our forecasts for industries, like for example, real estate.
Black: So obviously, it's clear that that benefits companies like Zoom and Microsoft over the long term, I think one sector where the outlook is perhaps less clear is travel. And that was really hit hard in 2020.
Morozov: Yeah, and it was hit hard for the right reason. So, what our airline analysts with our travel analysts try to do, is try to find a precedent -- historic precedent that perhaps had similar implications or similar changes to consumer behaviour. And we don't have to go far, far back 9/11 obviously was a game changer at that point for lot of folks, lot of travel was postponed, there was definitely a significant amount of fear. So our analysts took a look at the behaviours that followed this, this lull, the immediate lull, to see if they can have any lessons learned from last time that happened. And what we have seen is that the fear doesn't tend to have staying power. And perhaps the fear now might be a little different, because what happens if the virus mutates? What happens if the vaccine is less effective, but historically, what we've seen that fear itself doesn't really have very sustainable, doesn't really cause very sustainable damage to consumer behaviours. So what we anticipate is that it might take perhaps 6 to 12 months, but we're going to start seeing an uptick and potentially even pent up demand start really showing up in the higher travel volumes and that's definitely good for a beaten down airline stocks or a beaten down industrial companies that supply, Airbus and Boeing, for example. As well as the hotel operators, booking firms, et cetera.
Black: So something Morningstar analysts think about a lot is valuation because regardless of the outlook for the sector, a key thing for any investor is don't overpay for the stock. So as we sit here today, is the stock market overvalued or are there still opportunities out there?
Morozov: So, market reaction tends to kind of zero in on near-term dynamics expectations and perhaps extrapolates them a little bit too far in the future. So, take a look at the performance of the tech sector obviously the hottest sector and for a reason, our behaviours have changed, as I've noted earlier, we are going to be more comfortable with the technology, that we have not been comfortable before. But how much of that has already built into current valuations. Our analysts on the tech team think that the tech sector is definitely overheated. So a lot of exuberance that we see right now in current fair value estimates for the tech companies. On the flip side, there are a number of sectors that are still fairly unloved. A lot of the companies that, stocks that fall into this value category or sectors that perhaps don't have any immediate catalyst on the horizon are very much unloved by the market, whether it's financial services, energy, industrial, real estate. So we tend to see some opportunities, perhaps some more opportunities in those sectors, especially as we start looking at the long-term cash flow generation of those businesses and we really don't see perhaps significant structural damages to their operation. So we're more than comfortable recommending a lot of those stocks for the long run.
Black: Alex, thank you so much for your time. For Morningstar I'm Holly Black.
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