Movies such as the Contagion have a fascination with pandemics and unidentified viruses threatening human life. The spread of the COVID-19 and the fear it has managed to strike in our minds is no different from that displayed in such movies. However, most of these movies fail to show the real impact of the virus – impact on businesses, trade, and the way economies evolve through such situations. While the world is gradually reopening its doors from months of lockdown, it is important to understand how it has changed our world.
With the end of the second quarter upon us, it’s time again to look at how the markets have fared on a quarterly basis. For the quarter, the estimated earnings decline for the S&P 500 is -43.8%. If this does turn out to be the actual decline, it will mark the largest year-over-year decline in earnings reported by the index since Q4 2008 (-69.1%). For Q2 2020, five S&P 500 companies have reported a positive EPS surprise and 4 S&P 500 companies have reported a positive revenue surprise.
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Let’s look at three important sectors and understand the trends at play here.
The banking sector’s performance in the equity and debt markets since the COVID-19 outbreak has replicated the tumultuous experience faced post the collapse of Lehman Brothers in 2008.
During the first phase, the market sell-off caused an overwhelming sweepover of the sector, causing the sector to underperform significantly relative to others. Still, there was some differentiation by bank nationality. Those banks which already had a high level of credit risk saw their credit default swap (CDS) spreads increasing by a huge margin.
The subsequent policy measures since mid-March have helped tremendously in stabilising the economy. These measures have, however, unanimously favoured banks with high profitability and healthy balance sheets. Less profitable retail banks have seen their long-term rating outlooks revised to negative.
One of the few names in the sector to deliver some positive news is Visa. Visa’s shares have done slightly better than the broader market so far, but the company is also expected to experience a slowdown this quarter as its cross-border business starts to show the effects of the coronavirus outbreak.
Healthcare and Pharma
Renaissance Capital, a global initial public offering investment advisor, released a report on June 24 which suggests that IPOs in the healthcare sector are on a boom. The report indicates that biotechnology companies make up almost two-thirds of the IPO activity in the second quarter of 2020..
The race for a vaccine for COVID-19 has also thrown up some names to look out for. Shares of Novo Nordisk and Moderna, for instance, have been standout performers during the current market. The spread of COVID-19 has also created a defining moment for digital health offerings. Many products and services once considered “nice-to-haves” have recently transformed into necessities.
Going forward, we will see much more innovation in this sector from tech giants, governments, and healthcare stakeholders. The biggest deal so far for a US-based digital health company in Q2’20 was telehealth company Amwell‘s $134M round. Amwell has reportedly filed for an IPO later this year, adding to the momentum from the Covid-19 driven surge in demand for telehealth services.
We have already seen stocks of SaaS companies like Zoom go up during the pandemic. In the coming days, Big Tech will play a huge role in our lives and will continue to dominate market headlines as well.
As we enter a new decade, one thing remains certain: cloud adoption will continue to rise as companies embrace flexible models of remote working and consumption. COVID-19 has had a huge impact on the technology sector, affecting supply of raw materials, disrupting the electronics value chain, and causing an inflationary risk on products. More positively, however, the disruption has caused an acceleration of remote working models, and increased focus on evaluating and de-risking the end-to-end value chain. In addition, potential reduction in carbon emissions could result in renewed focus on sustainable practices. With the recent explosion of the Internet of Things (IoT), combined with the increased portability of computing power and AI-driven tools, the world is poised for the growth of ‘edge computing’. Investors should be mindful of the fact that most of this hype is reflected in today’s prices. Even some of the simple growth ratios like the Price to Sales/share ratios have reached historically high levels.
Other Important Factors
While the above gave you a broader perspective of the market trends currently in action, there are some other important factors that we need to be aware of. Below is a list of macro and micro economic themes that we expect to see playing out over the rest of the year:
The COVID-19 shock has created the sharpest global economic contraction since the 1950s; however, most analysts believe the contraction will be short-lived and will be front loaded in nature. Unlike most past global recessions, the current recession is services-led as opposed to manufacturing-led, likely resulting in larger job losses.
However, analysts also expect the United States—and the global economy—to bounce back in the second half of the year. There are concerns about the rebound being delayed, but a meaningful recovery by the end of the year seems likely. While we are seeing a rise especially in sentiment indicators rebounding sharply, other indicators monitoring the underlying economic activity are showing a slower rate of recovery
While aggressive action by the central banks has reduced the likelihood of an impending credit crisis, some risks do remain and should be closely monitored. The U.S. Federal Reserve (Fed) might not pursue negative interest rates, but short-term interest rates will remain anchored at low levels for a long period.
As long-term investors who have navigated many ups and downs – the global financial crisis of 2007/2008 and the European sovereign debt crisis come to mind – we know that this too shall pass. As of this writing, the global initiative to develop effective treatments and vaccines is in an advanced stage. We have seen aggressive policy actions from governments across the globe, both in terms of monetary and fiscal stimulus packages, aimed at cushioning the economic damage and paving the road to recovery.
After the sharpest market fall in such short time, we have seen in Q2 an unprecedented recovery that has brought new all-time highs in many technology related sectors. We are facing high level uncertainty ahead. Will the fundamentals catch up with what the price action has anticipated so far? Who is going to lead the race for the next 4 years in the white house? Will the unprecedented central bank stimulus put an end to a multi-decade deflationary trend that was driven by demographics and globalization?
All these are important questions for every investor. While we don’t have a crystal ball to look into the future, our advisors can help you with whichever scenario you expect. If you are looking for an advisor to help you, you can always write to Kristal.AI at [email protected].
Kristal.AI is a Digital-First Private Wealth platform that provides investors access to curated portfolios from the world’s top portfolio managers. With our proprietary algorithm, we help investors choose the best investment strategies, portfolio optimization, and global investments at the best market value to meet their financial goals.
All members of our Investment Committee have held leadership positions in various institutional banks – Asheesh Chanda, former Head of FICC sales to Private Banks of J.P. Morgan; Swapnil Mishra, former Managing Director of Deutsche Bank; and Thomas Meichl, Executive Director of J.P. Morgan.
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