Asset prices have always been subject to market risks such as hyperinflation, recession, and bank and stock exchange crashes.
Experienced investors can often manage such risks by staying informed and taking the right advice, meaning the smart money rides out the crisis.
However, the Covid-19 outbreak has created a completely different crisis – a pandemic.
After China’s economy contracted 6.8 per cent in the first quarter of this year, many other countries are expected to undergo a similar domino effect. The lack of clarity on when the world will return to “normal” has overwhelmed investors, causing panic sell-offs with no thought of tomorrow. In the first quarter, we saw the effects of this on many risk assets.
As events unfold, smart investors have begun to realise that not all pandemic asset classes have behaved in the same way as crude oil and airline stocks, meaning different opportunities now shape the investment markets.
For some companies and economic sectors, Covid-19 has even been an opportunity for growth.
Healthcare stocks were initially hit by the coronavirus sell-off but some later soared, from Teva Pharmaceuticals’ stock climbing 40 per cent in one month to Johnson & Johnson’s 10 per cent-plus gains.
Other asset classes to watch are food commodities such as orange juice, wheat and rice, all of which tracked initial gains and may rise further as consumers stock up and then restock in a crisis. Here are some sectors to watch:
During the past two weeks of the first quarter, orange juice futures rose 20 per cent, reflecting a sharp rise in demand and reduced supply because of tight coronavirus transport restrictions. The spike soon levelled out, but there is scope for more growth during the pandemic.
Wheat and rice commodities also rose until solutions such as the European Union’s ‘green lanes’ – fast lanes at border crossing for lorries carrying freight – were put in place to keep the supplies of food and medical products flowing.
The crude-oil tanker industry is faring much better than their energy supplier counterparts as rates for very large crude carriers surged amid higher-than-usual inventories, say industry reports. The vessels are needed as floating storage units because producers are running out of space amid a global oil glut.
Digital asset classes
Streaming entertainment companies such as Netflix and social media companies such as Facebook are now some of the few sources of leisure and connection for self-isolated populations. As these digital services and products become more central to society’s well-being, their value will be supported accordingly.
In the business world, virtual reality meetings and digital business processes have also won support for the same reason. Videoconferencing app Zoom, for example, has gained a surge in daily users to 200 million, from about 10 million in December.
The safe-haven precious metal is a firm favourite with investors amid the coronavirus volatility risks. Gold price benchmarks approached nine-year highs and might be even higher if it weren’t for the clear winner in safe-haven buying: cash.
As fearful animal spirits rule the markets in a crisis, cash is a shelter. The US Federal Reserve’s gigantic economic stimulus translates into cheques for each American and the US dollar is supported by strong demand. Risk assets may face months of sell-offs in favour of hard cash to ensure essential supplies for households and businesses.
This phenomenon could go in several directions. On the upside, the cash-rich could keep supply chains oiled for the time it takes to beat the coronavirus crisis. On the downside, the combination of a global recession and higher food prices may not end well, leading to inflationary pressures burdening consumers.
Predicting the end of any crisis is difficult, let alone an unprecedented one such as Covid-19. We may learn more about the market’s adaptation as some countries, such as Spain, partly reopen their economies. If the partial reopening works, there will be higher hopes for a quicker than expected recovery, at least in the EU.
If we are still in the same predicament by the third quarter, there may be an economic evolution, meaning the entry of new technology and services that are more sustainable in a world where staying home and working remotely is normal.
Hussein Sayed is the chief market strategist at FXTM