COVID-19: The impact on global equities

May 29, 2020 09:35
The demise of physical cash and cheques relative to electronic payments is a trend unlikely to be altered by the COVID-109 crisis.  Photo: Bloomberg

The COVID-19 crisis has affected all asset classes; global equities have not been spared. In the long-run, equity market returns are dependent on realised and expected earnings, which are closely tied to economic growth. In this Q&A, global equities fund manager Giles Parkinson at Aviva Investors discusses the impact of the crisis across industries.

Which sectors have been hit hardest so far?
Investors are doing a pretty good job of distinguishing stronger companies from weaker peers and deciding which industries will see their revenues and profits impacted by this recession. No two recessions are alike, and in this downturn travel and leisure stocks have performed exceptionally badly. Then there’s the overlay of the oil market. In addition to the glut of shale oil supply coming into the crisis, the oil market now has a demand problem, as less travel means less energy consumption. Investors are also starting to look at the implications for supply chains.

Which sectors have proven more resilient?

Tech companies have outperformed – not so much chip manufacturers, but rather cloud software businesses with ostensibly recurring revenues. The extent to which their revenues will ultimately be impacted by lower corporate budgets remains to be seen.

Consumer staples have also been resilient in general, but there are nuances. Some pockets that usually perform well in a downturn have been affected by the specific characteristics of the COVID-19 lockdown.

Should investors be looking at the state of corporate balance sheets to determine whether companies will make it through the downturn?

It’s too late for that. You can tell how a stock has performed over the last two months by answering two questions: The first is, “what has happened to the company’s daily revenues during the lockdown?” The second is, “what is its balance sheet like?” If a company has a lot of debt – especially debt with covenants attached – and its revenues have fallen to near zero, then its equity will have performed extremely poorly.

You need to be able to read a balance sheet in order to determine the strength of a company at times like this.

There is a renewed focus on corporate governance and behaviour during the crisis. Are you monitoring this, given the reputational risk for companies that are seen to be behaving irresponsibly at this time?

Yes. Quantitative factors tend to get dropped into a Bloomberg spreadsheet and quickly become arbitraged away; judging qualitative measures, like corporate behaviour, is more difficult and therefore more rewarding for assessing value.

Some company executives have pledged to take a salary cut during the crisis, and that’s an interesting trend. Others have extended support to their customers and suppliers. The effects of this may last beyond the pandemic.

How about other longer-term implications of the pandemic?

Predicting longer-term thematic shifts is notoriously difficult. I find that an easier approach is often to invert the question and ask, “what’s not going to change?” I think you can answer this question with greater confidence and build a stronger investment thesis around the answers.

One thing that is not going to change, for example, is the demise of physical cash and cheques relative to electronic payments such as debit and credit cards.

-- Contact us at [email protected]

Portfolio Manager at Aviva Investors