Winners & losers in a health pandemic: Which sectors will prove resilient (and which won’t)
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The COVID-19 pandemic fits most of the criteria for a Black Swan even on markets, and it’s left many investors scrambling to protect their portfolios.
In this case, the initial impact was savage, as major stock indexes around the world set new (unwanted) records for the pace and velocity of their declines.
As the crisis becomes more entrenched, there are still many more questions than answers.
Among the various unknown factors to assess are; the effectiveness of government stimulus in protecting the economy, the odds of any near-term (and scalable) medical breakthrough, and whether an extended lockdown period will result in any loss of broader productivity which can’t be brought back.
But with any major shock to markets, interesting dynamics come into play that determine a new set of winners and losers in the investment landscape.
Among the obvious winners in the early going were grocery outlets, such as Woolworths (ASX:WOW) and Coles (ASX:COL). Analysts from UBS recently estimated that annual grocery sales jumped 25 per cent in March as buyers flocked to stock up on key items.
Such outlets fit the criteria of a recent presentation from Ross Benson, executive chairman at advisory group InvestorLink, who said companies that perform well in a Black Swan event such as COVID-19 meet the following criteria:
– Strong online presence;
– Established scale;
– Provider of necessity items.
While not every sector ticks all of the boxes, businesses in fields that meet some of the criteria have been more resilient to the sharp correction in the broader market over recent weeks.
For example, Stockhead recently assessed the potential of listed education platforms with a dedicated online presence – learning solutions which have been given an increased sense of urgency by the impact of the crisis.
And this week, Rachel Williamson highlighted a number of small-cap opportunities in the Australian agricultural sector, which has proved resilient as a producer of necessity items.
Black Swan events can also give rise to innovation, as people are forced to adapt to new conditions and become more aware of the need to be flexible in the event of unexpected shocks.
In a report yesterday, the University of South Australia said the COVID-19 crisis “could prompt a wave of innovation in virtual and augmented reality applications”.
The research team at the school’s Centre for Interactive and Virtual Environments is currently developing a remote teaching system using virtual reality and a 360-degree video.
“It’s a bit like when you share your computer desktop with an IT expert, but you’re able to share your whole, real-world working environment,” Professor Mark Billinghurst said.
He added that the back-end technology for these systems “are already in place”, but the challenge is in developing the user interface to create a meaningful experience.
Whether its existing businesses looking to build market share of new innovation, the pandemic looks like it’s on its way to changing the investment paradigm for at least the medium term.
This table from InvestorLink summarises the sectors that could benefit from fundamental shifts in investment strategies, contrasted with industries that are likely to absorb the brunt of the impact from the effects of a health crisis:
|Daily consumables (e.g. Supermarket goods)||Discretionary retail (online and offline)|
|Gaming - counter-cyclical||Travel - airlines / buses / trains|
|Online payments||Accommodation / hotels|
|Heath services (excluding dentistry)||Property owners - commercial / retail|
|Medical devices - supply & development||Offline education & training|
|Online education & training||Financial services linked to funds under mgmt|
|Data spectrum services / data infrastructure||Discretionary spend financiers (online & offline)|