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The next narrative

  • Financial Analyst
  • Blog post submitted on 28th April 2020
Tom

We are definitely living in interesting times. Markets have recovered quite significantly since the March lows, with equity markets re-entering a bull-market, while credit markets recouped notably from the severe losses experienced last month. The rebound in markets has been largely attributed to the strong government and supranational support via economic measures, as well as progress in the development of the COVID-19 cases.

As cases worldwide have come more under control, panic recoiled from markets and asset prices recovered a large chunk of their losses. The question on many investors’ minds is where do we go from here?

The key in identifying market direction is determining the narrative that is going to make markets tick. On the positive side, there will be follow through from a reduction in COVID-19 restrictive measures and a gradual return to a semblance of daily normality. Business re-openings and employees returning to their workplaces, together with eventually lower unemployment levels and economic indicators should create positive headlines. This should generate a lower level of general uncertainty, including consumer confidence, which is conducive to healthy corporate earnings and asset prices to boot.

On the more concerning side, is the publication of earnings figures for the second quarter of the year to come, and possible outlooks for the rest of the year and spilling over into 2021. As has been witnessed in the company earnings for the first quarter of 2020, most companies were not yet in the thick of the impact of the lock down, therefore the full extent of the impact on earnings is still unknown. Most companies to date have understandably been non-committal on their guidance for the rest of the year.

A big question mark remains the longevity of the recovery; the so called V, U or L- shaped recovery. In this respect, there are mixed signals coming from equity and debt markets, with general equity prices signalling a V-shaped recovery, while debt markets leaning towards a U-shaped recovery, with weaker credit profiles trading at distressed levels as the increased debt burden is deemed sultrier. Any divergence from these embedded assumptions could see significant market movements. At this point, given that management themselves are unsure of the timeline to full-on activity, it is more practical for us to identify the sectors which are positioned to recover faster and possibly stronger from this crisis, and focus investment in these areas in order to mitigate, at least in part, some of the risk involved.

In this respect, the technology sector has proven to be less heavily impacted, on the contrary they introduced us to a possibly more permanent digital way of living and working. Market commentators are indeed pointing to the aftermath of the crisis as an opportunity to reassess daily habits, including meetings and even office life. The implications of this are huge, not only for the tech sector, but other industries such as transportation, fitness & well-being and even catering, all of which would be negatively affected.

Other interesting sectors include the gaming sector, specifically online casino, which reportedly has seen increases in its daily volume since the worldwide mobility restrictions. The consumer staples market has witnessed mild decreases in activity generally, with core sub-sectors such as food and white goods seeing increases.

The evidence from China to date, which has been front running the crisis, is that daily living worldwide will sequentially normalise, albeit at a controlled pace. To date, data coming out of China indicates that consumption patterns are still some way off from previous year levels, with the bulk of the activity being in heavy industry and staples as opposed to discretionary products, which may take a while to recover to pre-crisis levels as consumers’ wallets will take time to thicken again following the COVID-19 shock. However, despite we are of the view that uncertainty is still high, investors should be comforted by the fact that both Governments and Central Banks are playing an important role in stabilising such an extraordinary event. Rather than staying at bay, investors should be selective and tap sectors, which are less vulnerable in the current circumstances.

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