There's a silver lining to every crisis
GLOBAL stock markets set a record speed for crashes. Over the next six to twelve months, economic data is expected to be bleak. That is known. However, as investors it is our duty to consider the horizon beyond the next year as the market is a forward discounting mechanism. Large global liquidity injections both on a fiscal and monetary level mean that the odds of a public health crisis unfolding into a financial crisis is now muted.
Predicting the market bottom will be less important now given that global equity markets have crashed close to 30 per cent from its peak to trough. Are there further downside risks? Perhaps. But the conditions are in place for a strong market recovery which is but a matter of time. Therefore, it is imperative for investors to begin thinking about the winners that will flourish in the post-Covid-19 world, because it is likely that the crisis will dramatically change how we live and work in the future.
What are the types of businesses that could thrive as we come out of this huge economic shock? Looking under the hood of the 24 sub-industry groups (rather than sectors) and applying some logic can help give us a good idea.
The damage to some industries may be irreparable. Many companies could disappear altogether - via bankruptcy filings or merger & consolidation - or may be forced to change their business models to survive. The worst-performing industry groups are the ones dependent on a cyclical recovery of the broad economy. These are interest rate sensitive industries which depend on a broad increase in aggregate demand for goods and services within the global economy. These areas have been hit particularly hard given the sudden shortfall in demand for goods and services.
Financials, energy, industrials and materials-related companies belong in this camp. Investing in these sectors with a broad brush may be difficult as idiosyncratic risks within these firms will likely have risen significantly by the time this coronavirus episode ends, as many will be forced to accept bailouts and increase their overall debt load. However, taking on tactical (but short term) exposures to these industries to take advantage of their depressed prices could make some sense.
Better choice
Funds such as Fidelity Global Finance Services Fund and BlackRock World Energy Fund are some ways retail investors can gain direct exposure to these segments. Given the heightened financial risks associated with these segments, gaining exposure to these investment plays via stock-picking professional fund managers may be a better choice as careful judgment on financials and balance sheet at a company level will be required.
On the other hand, the types of companies that will grow bigger and stronger, in my opinion, are the ones whose business models focus primarily on e-commerce, or derive a big chunk of their revenues from the internet. For these internet companies, quarantine and lockdown measures are the perfect catalyst to influence those who have never been part of the digital economy. Therefore, companies belonging to the digital economy are the ones you want to own for the long term due to their extended growth potential.
Current and future technology related services supporting the burgeoning digital economy will only grow bigger as a theme. The digital economy is a multi-trillion dollar market, and the amazing thing is, this market is only about 20 years old. While it has experienced strong growth over this period, we believe the runway for growth in the digital economy is still long and wide, especially when a greater number of companies may conduct their business and operations online in the future.
Cloud computing, 5G, data centre Reits, and semiconductor producers are some of the potential winners coming out of this crisis. From a performance perspective, tech related companies are perhaps one of the more resilient industry groups. The technology hardware & equipment subsector generated returns of -0.4 per cent, and software & services -1.8 per cent over the past three months.
Their strong performance so far is indicative of their longer-term growth potential, which many investors are willing to overlook amid the current near-term economic weakness. Funds that investors can consider are Franklin Technology Fund and Fidelity Global Technology Fund - they both have comparably strong track records relative to their peers.
Biotechnology, pharmaceuticals and medical devices companies (under the health care sector) are also another group of industries that will do very well over the long term. This does not come on the back of Covid-19. These industries have very strong secular tailwinds driving their growth. Increasing innovation, ageing demographics, as well as a richer middle class are some structural factors contributing to the industries' long term growth.
Growth potential
Some of these segments have been hit hard (ie health care equipment & services), and investors may consider picking up these investments on the cheap. Most of these companies' value lie in their long-term growth potential, and nothing suggests that their long-term fundamentals have changed in any way. To make a play on the future of healthcare, Janus Henderson Global Life Sciences Fund and BlackRock World Healthscience Fund are some funds worth considering.
Investing your monies now in the middle of a crisis sounds counterintuitive and requires a lot of courage. But if you believe normalcy is not too far off the corner, then perhaps making your move at a time when prices are depressed could be a very good decision in hindsight. In any case, life still goes on. Do you see the cup as half full or half empty?
