Abu Dhabi, UAESunday 6 December 2020

Should you buy the pandemic’s winners – or its losers?

In a negative interest rate world, some sectors offer investors the prospect of attractive payouts

Big tech has been the big winner of the crisis. Four US tech titans now have market caps above $1tn: Apple ($2.1tn), Amazon ($1.68tn), Microsoft ($1.67tn) and Google owner Alphabet ($1.06tn). AFP
Big tech has been the big winner of the crisis. Four US tech titans now have market caps above $1tn: Apple ($2.1tn), Amazon ($1.68tn), Microsoft ($1.67tn) and Google owner Alphabet ($1.06tn). AFP

When global stock markets crashed in March, not everything crashed at the same speed.

While the travel, leisure, energy and banking sectors were impacted, others have enjoyed a good pandemic, notably technology, healthcare and utilities.

As the world finds itself in the grip of a second wave of Covid-19, the gap between the winners and losers seems wider than ever.

So, what should investors do? Go bargain hunting in bombed-out sectors in the hope they rebound in the months ahead, or stick with recent winners? The answer depends on the sector.

Travel and leisure

The travel industry is perhaps the year’s biggest loser. As countries close their borders and quarantine arrivals, business and personal travel has collapsed.

This is a disaster, given that it is arguably the biggest industry in the world. Before the pandemic, it generated $5.7 trillion in revenues and sustained almost 319 million jobs, or about one in 10 on the planet.

Airlines are largely grounded, with carriers such as American, Delta and United in the US, Air France-KLM and British Airways owner IAG in Europe, and Singapore Airlines calling on state and shareholder support, while Emirates airline recently got $2 billion from the Dubai government.

Cruise operators such as Carnival are also in deep water, as are hotel chains such as Marriott, Hilton, Best Western, Hyatt and InterContinental, while Walt Disney’s theme parks have taken a massive hit.

Chris Beauchamp, chief market analyst at global trading platform IG, says investors remain jumpy. “We have a tough winter ahead of us, as travellers cancel bookings and consumers think twice about a winter getaway.”

The travel sector recovery may be delayed until we get a vaccine, whenever that is.

A Rolls Royce Trent XWB engine in a factory in Derby, central England. Aircraft engine specialist Rolls-Royce had previously pulled out of talks for Boeing's NMA, saying its engine was not likely to be ready by the time the model is proposed to make its debut in the mid-2020s. AFP
A Rolls Royce Trent XWB engine in a factory in Derby, central England. Aircraft engine specialist Rolls-Royce had previously pulled out of talks for Boeing's NMA, saying its engine was not likely to be ready by the time the model is proposed to make its debut in the mid-2020s. AFP

Aircraft makers

With airline fleets grounded, US-based aircraft maker Boeing has seen its share price halve this year, while British aircraft engine specialist Rolls-Royce is down three quarters.

Yet, there may be opportunities here. The Rolls-Royce share price has doubled in the past few days, as management delivered a rescue package. It has now raised $2bn on the bond market, double the amount anticipated amid strong demand.

Susannah Streeter, senior investment and markets analyst at UK advisers Hargreaves Lansdown, says: “Investors seem heartened that this could be the start of a long, slow turnaround for Rolls-Royce.”

The sector may be cheap, but remains a long way from lift-off.

The growth of streaming giants like Netflix indicate we may have seen the peak of this cinema industry

Vijay Valecha, Century Financial

Energy

The energy sector is another big loser as a locked-down world uses less fuel, with UK oil majors BP and Royal Dutch Shell both down 60 per cent year-to-date.

Oil giant ExxonMobil was once the world’s largest publicly traded company. Its market capitalisation peaked at $500bn in 2007, but today it stands at just $138bn.

In August, it fell out of the Dow Jones list of top 30 US companies for the first time since 1928. In a sign of the times, it was replaced by software stock Salesforce.

Vijay Valecha, chief investment officer at Century Financial in Dubai, suspects we have already seen peak oil usage. “The EU has approved the biggest green stimulus package in history worth $572bn, and this could accelerate the transition towards electric vehicles or clean fuels like hydrogen.”

Russ Mould, investment director at wealth platform AJ Bell, says do not write off big oil yet, as demand may pick up once the pandemic eases, at the same time as shale output and global oil rig activity plunges. “That could make for a surprise cyclical comeback from an industry that financial markets seem to be writing off.”

Cinema

The silver screen has lost its shine, with Christopher Nolan’s confusing blockbuster Tenet failing to save the stricken cinema industry, while the latest postponement of James Bond film No Time To Die felt like a killer blow, with chains such as Cineworld and Regal closing their US and UK theatres as a result.

Mr Valecha notes that box-office receipts were stagnating before the pandemic. “The growth of streaming giants like Netflix indicate we may have seen the peak of this industry, too.”

Commercial property

As more staff work from home, demand for office space is likely to fall. Mr Valecha says commercial property could be hit by another trend. “Many bricks-and-mortar retail stores are likely to go bankrupt due to rise in online sales.”

He recommends avoiding the real estate investment trust sector, as tenant demand could plunge.

However, Paul Jackson, global head of asset allocation research at Invesco, says reduced demand for office space could also present a recovery opportunity. “Despite the risks, we think real estate represents good value and offers higher yields than other asset classes.”

A trader works inside the Goldman Sachs booth at the New York Stock Exchange. Goldman Sachs returned to its winning ways with a big jump in quarterly profits. Reuters 
A trader works inside the Goldman Sachs booth at the New York Stock Exchange. Goldman Sachs returned to its winning ways with a big jump in quarterly profits. Reuters 

Financial services

The big banks have been hit hard but have just delivered a positive US earning season, says Mr Beauchamp. “Goldman Sachs returned to its winning ways with a big jump in quarterly profits, while Wells Fargo and Bank of America also issued rosier updates.”

Mr Valecha says large, well-capitalised banks have an opportunity. “They could boost their market share as smaller rivals struggle to cope with a rising tide of bad debts.”

Technology

Big tech has been the big winner of the crisis. Four US tech titans now have market caps above $1tn: Apple ($2.1tn), Amazon ($1.68tn), Microsoft ($1.67tn) and Google owner Alphabet ($1.06tn).

Individually, Apple, Amazon and Microsoft are now bigger than the entire S&P 1200 Energy index, now valued at around $1.3tn.

Technology and online retailers could struggle if the global economy continues to improve and investors switch into riskier but potentially more rewarding sectors

Paul Jackson, Invesco

At the start of the year, Zoom’s stock traded at just over $68. If you had invested $10,000 then, you would have around $73,500 at today’s share price of just over $500.

Some analysts fear tech valuations are inflated, Mr Jackson warns. “Technology and online retailers could struggle if the global economy continues to improve and investors switch into riskier but potentially more rewarding sectors, such as banks.”

Big US tech could take a hit if former US vice president Joe Biden wins the election on November 3, as he has proposed hiking the corporate tax rate from 21 to 28 per cent and increasing taxes on overseas revenues.

Mr Valecha says investors concerned about big tech might prefer to target other digital growth areas. He says you can invest in home entertainment, online education and social media through the Direxion Connected Consumer ETF.

As online fraud rises, he tips ETFMG Prime Cyber Security ETF, which invests in the cyber security industry.

The Amplify Online Retail ETF invests in companies that derive at least 70 per cent of revenues from online or virtual sales. “They should benefit from e-commerce growth,” Mr Valecha adds.

A visitor leaves GlaxoSmithKline's headquarters in London. Global heavyweights such as Johnson & Johnson in the US and GlaxoSmithKline in the UK have benefited from the pandemic. Bloomberg
A visitor leaves GlaxoSmithKline's headquarters in London. Global heavyweights such as Johnson & Johnson in the US and GlaxoSmithKline in the UK have benefited from the pandemic. Bloomberg

Healthcare

A global pandemic has been good for healthcare companies, and the race to produce a vaccine has focused attention on the sector. Another attraction is that they offer reliable dividends, when other companies are cutting their shareholder payouts.

Global heavyweights such as Johnson & Johnson in the US, GlaxoSmithKline in the UK and Swiss stand-outs Hoffmann-La Roche, Novartis and Bayer have all benefited.

Christopher Davies, chartered financial planner at The Fry Group Middle East, says as investors seek yield in a negative interest rate world, healthcare stocks remain attractive. “We are likely to see further outperformance, due to their strong cash flows and defensive balance sheets.”

Mr Davies says utility companies should also remain attractive, again, thanks to their defensive position and relatively steady earnings and dividends.

Mr Valecha has spotted an opportunity in telemedicine and digital health, as many doctors move to digital consultations. “A good way to play this trend is the Global X Telemedicine & Digital Health ETF.”

Precious metals remain a relatively safe haven and should have a role in any portfolio

Tom Stevenson, Fidelity International

Gold

Safe-haven gold has dazzled in the pandemic, with the price hitting a record high of more than $2,067 an ounce in August, although it has slipped to $1,898 at time of writing.

Tom Stevenson, investment director at global fund manager Fidelity International, says don’t call the end of the gold rally yet. “Precious metals remain a relatively safe haven and should have a role in any portfolio."

Cryptocurrency Bitcoin has also had a good 2020, rising from $7,251 to just over $11,337 at time of writing, but Mr Mould says the debate over its value continues to rage: “For the moment, the Bitcoin believers are having a better year of it.”

Updated: October 18, 2020 05:49 PM

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