Investment Management -
Investing during a pandemic
COVID-19 has been by anyone’s measure one of the most significant economic events of the last century. The long-term impact on not just the global economy, but also on society in general, is arguably as or more consequential than the Global Financial Crisis of 2008-9.
Although markets have rebounded, the price movements we saw in nearly all asset classes during the peak of the crisis were extraordinary. From their respective peaks on 17th January and 19th February respectively, both the FTSE 100 and the benchmark US S&P 500 fell around 34%1, including daily moves of more than 10%, the likes of which had not been seen since Black Monday in 1987.
Selling was indiscriminate at times, with the S&P’s ‘circuit breakers’, triggered during particularly rapid falls, kicking in on three days, pausing trading for 15 minutes to allow investors to assess the situation and lessen panic-selling.
The sell-off was by no means confined to equities: higher-yielding ‘junk’-rated bonds sank nearly 22%2 as investors took fright over firms’ ability to repay their liabilities. This was exacerbated by the concurrent crash in the oil price - energy company debt being a large proportion of this lower-quality, ‘junk’ bond sector.
Both central banks and governments, perhaps more aware of systemic risks following the 2008 experience, reacted quickly and aggressively, passing a catalogue of stimulus and economic support measures in both record time and of record scope.
Although undoubtedly necessary, how and when this financial support will be reduced and ultimately removed is a matter for some debate. In the current crisis, the argument made after prior spending splurges regarding responsibility to future generations has been notably absent, but the debate appears now to have begun about how, at least in the UK, we are to pay for this historic spree in public spending.
As always with crises, there have been some obvious winners that have emerged from the still-settling dust.
This pandemic appears to have hastened change in how education might be conducted, alongside healthcare, socialising and working practices in general.
The so-called ‘Death of Distance’ theory first became evident in the 1990s as new internet and telecommunication technologies gained popularity. COVID-19 could be the driver for accelerated change whereby virtual university classes, online appointments with the GP, and working from home become the norm, rather than the exception.
This does not appear to have escaped the notice of the market: companies like Citrix, Microsoft, and Zoom, which all help companies operate and communicate virtually, have risen by 30%, 38% and 715% respectively3. Microsoft recently reported that total revenue growth compared to the same quarter in 2019 accelerated to 13%4, with daily active users of their corporate collaboration tool, Teams, increasing 234% between March and April this year5.
Zoom, the video call service, has also been a major beneficiary of the lockdown and working from home, its revenue soaring 355% and the number of large (>10 users) customers rising 458% compared to the same quarter last year6.
Increased communication from remote locations will likely continue to boost internet traffic and burden the current network infrastructure, forcing telecom companies to increase investment and update equipment, not least in the rolling out of the nascent 5G networks.
The associated higher demand for ‘cloud’ servers, computers and internet-infrastructure equipment will increase demand for computer chips, essential in such devices.
A whole range of companies stand to benefit from this, and the market again has taken note: Snowflake, a US company that facilitates analysis of cloud-based data, listed in September and is valued at 170 times its current sales (Tesla, another stock often cited as a ‘bubble’ this year, is at 18.6x)7. Firms in the semiconductor chip supply chain like ASML, Taiwan Semiconductor Manufacturing Company, Cadence Design Systems and NVIDIA are significant outperformers this year.
Furthermore, the geopolitical importance of this going forward has been illustrated by the pressure placed by the US on many countries to ban Chinese firms, in particular Huawei and ZTE, from having control or key stakes in their telecommunications networks, benefitting firms like Nokia, Ericsson and Samsung.
On the opposite side, the airline industry has been battered by plummeting demand as people stayed at home: IAG, owner of British Airways, said that passenger traffic was 95% down on a year earlier during the summer8. Despite this, it is hard to imagine that short-haul leisure travel will not at some point rebound to normal levels (trips to a Spanish beach cannot be done on Zoom, after all), but the same cannot be said for business flights.
As companies all over the world have discovered, deals can still be signed and board meetings can still occur virtually and expensing business-class travel for executives might be a thing of the past. Some airlines are more sensitive to this trend than others, and as the furloughing of employees comes to an end, changes to the workforces in the airline and related aviation businesses may prove to be more permanent.
Of course, these are obvious trends and a mere snapshot of some of the market action we have seen in 2020. The next article in the series will further introduce some of the trends we expect to see going forward, and what we are keeping top of our minds over the next few months.
Although there is cause for optimism, given recent progress on vaccines and rapid testing, we are still far from out of the woods with plenty of important decisions still to be made by governments, consumers and investors alike before any longer-term conclusions can be drawn from the COVID-19 chapter.
2Source: Bloomberg, based on the iBoxx USD Liquid High Yield Index as at 13/05/2020.
4Source: Microsoft Fourth Quarter Results Press Release, accessed via Factset 15th October 2020.
5Source: Statista https://www.statista.com/statistics/1033742/worldwide-microsoft-teams-daily-and-monthly-users/
6Press release of Zoom Video Communications, Inc. Second Quarter Results for 2020/21 fiscal year, accessed via Factset 15th October 2020.
8IAG Six Months Results Announcement, 31st July, accessed via Factset 15th October 2020.
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