Market perspectives: 27.03.2020

The spread of the coronavirus Covid-19 continues apace, with Europe and the United States now very much the epicentres of the outbreak and the number of cases more than doubling since we provided our thoughts on the crisis last Friday. Stricter social distancing measures are being implemented by governments, including here in the UK, where we have instructions not to leave the house, except to purchase food, to exercise, or to go to work, when that work cannot be done from home.

 

Despite that, global equity markets have rallied strongly this week, with the FTSE 100 Index up by more than 12% as at Thursday’s close, the STOXX Europe 600 up by 9.7% and the S&P 500 Index higher by 14.1%. The passage of a significant fiscal stimulus package through the US Senate, which includes plans for the government to send money directly to most US citizens, has been a driver of the strength in stock markets. Additionally, the US Federal Reserve stepped up its support for the US economy and financial markets by announcing a wide-range of measures, including facilities to purchase corporate bonds – something that even during the financial crisis it did not do.

On the corporate front

We continue to see companies providing business updates in relation to the outbreak, which can be very instructive as to how the situation is developing in different parts of the world, while also providing insight into consumer behaviour during the crisis and perhaps beyond. Nike’s Q3 earnings that were released this week are an excellent example of this. It reports that stores in China are reopening and that sales at some locations have reached pre-crisis levels suggests that the virus can be brought under control and that economic activity can rebound following periods of lockdown, potentially providing a positive read-across for other companies and perhaps other regions.

Nike’s results also included a significant increase in online orders in China, driven in part by increased usage of the company’s Nike Training Club app, an indication that people are looking for ways to exercise at home whilst on lockdown. In the UK, Dixons Carphone reported very strong online trading as people have been preparing to work from home, while US toy and board game maker Hasbro, the publisher of Monopoly, has been seeing “great demand” for its products according to its CEO, as people look for ways to entertain themselves and their children while stuck indoors. In a similar vein, shares in Electronic Arts, a leading video game company, have held up well during the recent market weakness.

Additionally, we have also seen companies that have reported that their businesses will experience relatively limited impact from the coronavirus outbreak. Orsted, the renewable energy company, reiterated its full-year guidance this week stating that its asset base is fully operational and its construction projects are progressing according to plans. E.ON, Europe’s largest operator of energy networks, stated that while there will be some impact on the business, the company is less exposed than those in other sectors, and that it expects that growth drivers for the business, such as the installation of climate-friendly infrastructure, will be even more crucial post-crisis.

The examples above are not to say that the coronavirus outbreak will not have a material impact on companies around the globe, but that the effect will be more nuanced than some of the indiscriminate selling that has been seen in the equity markets over the past weeks. Some companies in the most defensive sectors, such as utilities, should see less of an impact than others, as will those with long-term structural growth drivers. Additionally, the best companies will have levers to pull in order to cushion the blow from the outbreak, while consumer behaviours will change not just in the short term but also over the longer term as well.

The recent short-term swings in equity markets can be extremely difficult to predict. Furthermore, short-term demand for a certain product or set of products does not make for a long-term investment case, in the same way that a period of weakness in a company’s shares, particularly if due to events outside of that company’s control, does not imply a poor-quality business.

And so we continue to advocate taking a long-term thematic approach to investing – that is to seek to purchase shares in high-quality companies that have strong structural growth drivers. These themes will change over time and yesterday’s trends will almost certainly not be the same as tomorrow’s. But we believe that this approach, in allowing you to take a step back to consider where companies and sectors will be in three, five or maybe even a number of decades time, rather than by the end of next week, will stand you in good stead in times such as these.

Should you have any questions about anything raised in this article, please don’t hesitate to contact us via email, or on 0207 337 0777.

To return the Covid19 Hub, please click here

 

This note has been produced by Killik & Co on the basis of publicly available information, and all sources are believed to be reliable, but we have not independently verified such information and we do not give any warranty as to its accuracy. Some of the stocks mentioned in this note are covered by Killik & Co’s Equity Research team and others are not. The mentioning of the stocks does not represent a recommendation to buy or sell any securities, and the note is intended as a marketing communication rather than research. This note does not purport to be a complete description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. Nothing in this note should be construed as investment advice or as comment on the suitability of any investment or investment service.  Prospective investors should take advice from a professional adviser before making any investment decisions. There are risks with almost every investment that you may not get back the original capital invested. The value of your investments may fall as well as rise and the past performance of investments is not a guide to future performance.