While share markets have been significantly volatile in 2020, individual companies and sectors have seen varying impacts.

Some sectors, such as the travel industry, have seen substantial losses and failed to claw them back since March. Others, such as hand sanitiser sellers, have been surging.

Markets are now reaching a point that could prove decisive for the rest of the year — earnings season. In Australia it will occur as companies release full year results in July and August.

Investment banks are now advising clients to forget about broad defensive or cyclical strategies and look to individual sectors.

 

Look for “endgame winners”

One is JP Morgan which in a client note last week recommended COVID-19 “endgame winners”. It named technology, communications and healthcare as candidate sectors.

Among commodities it recommended gold, being most leveraged to an environment of low bond yields and interest rates.

While JP Morgan admitted a broad strategy may have worked during the April and May rally, this is less likely as earnings season approaches and the market slows down.

“Typically these high correlations mean-revert to their long-term averages within a few months, in part because the pace of quantitative easing slows and in turn allows country, sector and company-specific factors to reassert themselves,” said strategist John Normand.

The note warned the second half of 2020 would bring this sort of differentiation.

Another investment bank to give a similar warning was Raymond James. Its base case is a virtually flat market for the rest of 2020.

It said a better bet for investors is to look to favoured sectors.

“With the S&P 500 currently trading in line with this [base case] target, we would look to accumulate favoured sectors during market volatility,” said director of equity portfolio and technical strategy Michael Gibbs.

“Moreover, the market will need to pass the baton from valuation expansion to re-acceleration of economic and earnings expansion.

“We believe this could cause some periods of volatility as this transition takes place and would use any dislocation to add to positions.”

The sectors Raymond James named as facing the largest “earnings revisions” were energy, consumer discretionary goods, industrials and financials.

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