Abu Dhabi, UAEWednesday 12 August 2020

CORONAVIRUS

The winners and losers of the Covid-19 stock market crash

Which sectors and companies have come out on top and should you buy them?

A man walks past a cinema with the words 'stay at home' on display in Berlin's Kreuzberg district. While industries such as tourism and cinema may need several quarters to recover, people will eventually return to their old habits, say analysts. AFP
A man walks past a cinema with the words 'stay at home' on display in Berlin's Kreuzberg district. While industries such as tourism and cinema may need several quarters to recover, people will eventually return to their old habits, say analysts. AFP

The Covid-19 outbreak has been a disaster for the global economy and sent stock markets crashing all over the world, but there are opportunities to be found even in the worst hit sectors.

While airlines, cruise liners, hotel chains, cinema and theme park operators, car manufacturers and oil companies have been hammered, some are better placed to bounce back when coronavirus clouds start to disperse.

This coronavirus shutdown has crippled the [travel and transport} industry, but there may still be opportunities.

Vijay Valecha, Century Financial

Some companies have even benefited from the global lockdown, including supermarkets, streaming companies, telecom services and online retailers, while traditional defensive sectors such as healthcare and utilities have once again proved their merit.

Vijay Valecha, chief investment officer at Century Financial in Dubai, says you might find opportunities in the most surprising places, such as the stricken travel and transport sector. “This coronavirus shutdown has crippled the industry, but there may still be opportunities," he says.

However, Maurice Gravier, chief investment officer at Emirates NBD, says investors would have to be brave to buy stocks in cruise liners, oil services or motoring stocks right now. “The drop in demand is so deep that even if it’s temporary, it could lead to bankruptcies and consolidation. There may be relative winners, but it is too soon to take the risk."

Here, we analyse the winners and losers of the pandemic so far:

The winners

Technology

With the world locked in at home, technology stocks are coming into their own and may continue their recent strong run, Mr Valecha says. “Many companies have actually benefited from the pandemic, for example, Zoom Video Communications has seen a surge in online meetings, while Netflix has seen a rise in home streaming during the lockdown.”

Chat app Slack has also seen a surge in users, while workplace chat platform Microsoft Teams saw daily active users rocket by 12 million to 44 million last month, Mr Valecha says: “Peloton Interactive has also seen demand grow for its online exercise classes."

“PayPal should benefit from the switch to mobile payments, which may accelerate as people baulk at holding physical cash," he adds.

Michael Bolliger, analyst at UBS Global Wealth Management, says the outbreak may speed up transformations already under way "in health, including genetic therapies, health tech or telemedicine". He also sees opportunities in digital transformation "including e-commerce and enabling technologies such as 5G, AI and cloud computing".

One long-term impact of the crisis will be to accelerate the shift away from globalisation, towards localisation. “This could further boost demand for automation technologies, robots, and the Internet of Things," says Mr Bolliger.

Johnson & Johnson is tipped as a stock winner because its Covid-19 programme includes a potential coronavirus vaccine. AFP
Johnson & Johnson is tipped as a stock winner because its Covid-19 programme includes a potential coronavirus vaccine. AFP

Healthcare

Mr Valecha tips defensive sectors such as healthcare and says US healthcare giant Johnson & Johnson is “a stellar company and its latest Covid-19 programme includes a potential coronavirus vaccine”.

Healthcare provider and insurer United Health is another way to play this trend, Mr Valecha says, while US consumer goods giant Procter & Gamble, a traditionally defensive stock, may benefit due to its trusted personal health and hygiene brands, as should cleaning products provider The Clorox Company.

Utilities

A financial crisis is normally seen as a good time to hold utility stocks, as people still need gas, electricity and water even in a recession.

Utilities may offer little in the way of capital growth, but reward investors with a steady stream of dividends and Mr Valecha says you can invest in a spread of companies listed on the S&P500 via the Utilities Select Sector SPDR Fund.

Individual utility stocks have held firm, such as London-listed National Grid and water services company United Utilities. Both have fallen a relatively modest 15 per cent this year, and now yield 5.25 per cent and 4.75 per cent respectively.

Mr Gravier says companies operating in environmental sectors such as water, waste management and renewable energy may also benefit, as fiscal stimulus could end up funding new infrastructure development.

Gold

As a store of value and safe haven, many like to hold gold in a recession. While prices have actually been volatile over the last month, as investors took profits to cover losses elsewhere, they are now up 35 per cent over the last year.

Russ Mould, investment director at UK-based trading platform AJ Bell, says it could prove a good hedge against inflation, as central bankers print money to fight the crisis. "Similar splurges in the 1970s and early 2000s saw gold perform strongly. “If gold really does start to fly then gold miners should benefit, and investors could get exposure through the VanEck Vectors Gold Miners ETF.”

Asia

Although Covid-19 originated in China, the country now appears over the worst. Mr Valecha tips iShares MSCI Emerging Markets Index (EEM) as one way to play this trend.

Mr Bolliger says Asia may prove a long-term winner. “Other emerging markets may find the recovery challenging, given the multitude of shocks they are exposed to, including the virus, global recession and collapse in oil prices,” he adds.

Mr Gravier suggests investing in emerging giant India: “It is extremely volatile but the current sell-off offers a compelling entry point for the long run.”

For now, the dollar is strong, benefiting from typical safe-haven demand long evident during periods of crisis. Bloomberg
For now, the dollar is strong, benefiting from typical safe-haven demand long evident during periods of crisis. Bloomberg

The US

Despite the effects of Covid-19 on the US, Mr Gravier says investors should avoid the weakest regions of the world right now, which he names as Latin America and frontier markets, as well as developed Europe.

Instead, he advises focusing on what is still the world's largest and strongest economy, the US. “Unlimited global appetite from the world for the dollar allows it to print and borrow money indefinitely," he says.

Mr Valecha agrees, and suggests buying an exchange traded fund (ETF) focusing on solid US companies, such as Pro Shares S&P 500 Dividend Aristocrats ETF.

The losers

Travel

The travel industry has been one of the hardest hit sectors of all, as people stop travelling and some firms may go bankrupt.

There could still be opportunities for brave investors though, says Mr Valecha. Investors happy to take a risk on airlines should focus on the strongest operators, as measured by liquidity, solvency and profitability. “Three companies stand a cut above the rest: Ryanair Holdings, British Airways and Iberia owner International Consolidated Airlines Group and UK-based budget carrier Wizz Air Holdings,” he says.

Mr Valecha says even battered travel agency stocks could fight back. “Booking Holdings and Expedia Group are likely to rally once the economy recovers and customer behaviour normalises," he says.

He also sees opportunity in ride-sharing companies like Uber Technologies and Lyft, which are “cash rich and should survive this downturn”.

Hotels

The hotel industry is also under pressure, with London-listed InterContinental Hotels Group reporting the lowest demand ever due to restrictions on global travel and social contact, but brave investors could find bargains here.

Mr Valecha highlights Marriot Hotels and European hospitality operator Accor as solid names. Last week, Accor closed two-thirds of its hotels, temporarily laid off 75 per cent of its staff and cancelled its planned €280 million (Dh1.1 billion) dividend payout against 2019 earnings because of the coronavirus crisis as it seeks to preserve cash. However, chief executive Sebastien Bazin told Bloomberg Television he intended to reopen all of the properties and re-employ the workers as soon as possible.

Mr Bolliger says the tourism and entertainment sectors might need several quarters to recover, but people will eventually go back to some of their old habits. “It seems unlikely that cinemas will remain empty forever.”

Oil companies

Despite last Thursday’s production cuts, the oil price is struggling to recover, with WTI crude trading at below $23 a barrel.

This could drive many oil producers out of business, but Mr Valecha this could still be a buying opportunity, provided investors stick to established companies with strong credit ratings and hold on for the long term. “We would consider Italian multinational Eni and French producer Total, as well as Exxon Mobil, Chevron and Baker Hughes in the US,” he says.

Mr Mould agrees that oil companies look tempting after the sell-off: “Many oil majors have raised fresh debt and seem determined to maintain their dividend payments, providing valuable income when it is becoming harder to find."

Shipping

The coronavirus has slammed global shipping, as demand falls and supply chains are disrupted.

However, Mr Mould says there may still be an opportunity. The oversupply of oil has driven up supertanker freight rates, as traders, producers and refiners need somewhere to store the global oil glut.

This has driven up the cost of renting large crude carrier tankers beyond $200,000 a day, he says. “The share prices of leading players like Frontline, Golden Ocean, Diana Shipping and Scorpio have yet to respond, but once wider markets regain their nerve these stocks could surprise on the upside."

Banks

Some sectors are best avoided altogether right now, and Mr Mould says that banking is one of them, even though you can find massive bargains today. “Banks are in a tough spot, as bad loan risks are set to grow. Many are under political pressure to withhold dividends, removing one of the few reasons to hold them."

Right now, he advises investors focus on picking survivors, rather than winners: “Look for firms with strong balance sheets, net cash if possible, and minimum debt,” adds Mr Mould.

Updated: April 15, 2020 10:18 AM

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