19 March 2020
This week, Mark Hawtin discussed the winners and losers of governments' suppression tactics in light of the evolving Covid-19 outbreak.
There have had many occasions over the past 30 years or so where the trajectory for economies and stock markets has been very unclear. That seems to be the case at present; uncertainty is at its highest possible level. Our experience is that reducing gross exposure and raising cash is a relatively low-risk method of dealing with the crisis.
From a fundamental point of view, technology and the high growth sectors are normally hit the hardest in times of sharp selloffs. That said, although the tech sector has fallen in value amid Covid-19 fears, it has still outperformed the declining S&P as the benefits of remote working and cloud computing come to the fore. At present, governments are managing the outbreak using suppression tactics, encouraging people to work from home. While this continues, we believe that we will likely see cloud-enabling companies outperforming. Similarly, software as a service, often a volatile sector in a downturn, is holding up well as it too is a cloud based, remote access business type.
On the flip side, companies with exposure to the supply chain and general commerce have done very poorly in recent weeks – examples include former high flyers ASOS, Wayfair and Stitchfix all of which have fallen significantly. Hardware producers such as IBM and Dell have declined (they also suffer from the risk of excessive leverage). We anticipate equities in companies that have significant leverage will do poorly during this downturn as the debt fuelled excess of the last 20 years really starts to take a toll and become normalised.
Overall, it is our opinion that the cyclical part of the economy has room to decline further. Any recovery will likely be slow. In such unpredictable times, there is little for investors to do beyond watch, await more clarity and look for attractive buying opportunities.