Sectors To Watch When Investing Post-Pandemic.
As global economies start to reopen, it’s only normal to assume that the flow of capital investment will transfer into industries that are well-positioned to take advantage of a post-pandemic recovery. With that being said, it may be a good time to consider exposing your portfolio to some investments that might reap long-term rewards from the reopening of global economies.
Recent data indicates an improved US and EU labour market, increasing expectations for economic recovery. This has triggered a rotation in investor sentiment towards stocks, seen as more likely to benefit from the rebound.
One needs to remember, however, that we are still very much at war with a global pandemic, and new variants (like the Delta variant) may continually crop up. This may potentially throw economies in and out of lockdowns for years to come.
The Pandemic Crash
February 21st, 2020: The S&P 500 stock market index (representing the growth of the top 500 largest companies in the US) opened its trading day at a comfortable 3,345 points. Shortly after the opening bell, panic selling suddenly rippled throughout global stock markets sending shockwaves to both institutional and retail investors. The crash lasted a couple of weeks sending the S&P500 down to 2,300 points (roughly a 35% drop).
The pure uncertainty of having global economies in lockdown led both institutional and retail investors to wonder —
where do we go from here?
Pandemic Investing Trends
As the dust began to settle, and the world adjusted to this new normality, world banks and governments alike, came to a strategy that involved an extremely low-interest rate environment, and fiscal stimulus provided to the general public to ensure that consumer demand remains afloat, keeping as many businesses alive as possible. From here two new medium and potentially long-term trends emerged.
1 — People were stuck at home; Therefore the stay-home stocks (such as Netflix) benefitted hugely from this.
2 — A low-interest rate environment meant that innovative organisations could borrow money at near-zero interest rate costs for the foreseeable future, encouraging large spending in development and expansion.
These two macro trends encouraged the tech-sector. This is because people became more reliant on technology to get around the struggles of a lockdown, and in addition to this, organisations were simultaneously landing and expanding their own businesses at lower costs.
The end result — higher profitability.
Because of this, investors began to flood their money into tech stocks hiking up their valuations.
Post Pandemic Investing Trends
Nobody for sure can say how this is going to play out, nor can we predict exactly what is going to happen. However, there are still sectors that are well-positioned to take advantage of an ‘open economy’.
Financial Services Sector
Due to the pandemic, people were inevitably forced to stay home and the luxury of having the option to go to your favourite restaurant on the weekends suddenly vanished. Because people had fewer opportunities to spend their money, more was saved.
Now that the economies have started to ease on their restrictions, the build-up of savings has resulted in pent-up demand for a variety of products and services. This pent-up demand and acceleration of money supply circulating within an economy have led to an increased fear of high inflation occurring.
Jerome Powell- chair of the U.S. federal reserve had stated that the household expenditure (general cost of living) index for April 2021 stood at 3.6%, increasing notably in the past 12 months. The increase in prices are believed to be brought about by the surging demand resulting in supply bottlenecks as service providers struggle to onboard the necessary resources to cope with the demand levels. In addition to this, the increased supply of money will further result in short spikes in inflation in 2023.
Should this be the case and inflation does increase to higher rates consistently, the central banks will intervene increasing their interest rates discouraging businesses and consumers to onboard more debt, spend less, and save more, thus maintaining a healthy rate of inflation.
If interest rates rise, the cost to acquire and maintain a loan will increase. If this is the case, banks will profit from the higher interest rates on loans already taken by people and businesses.
During the COVID-19 pandemic, organisations were forced to ‘go digital’ to ensure continuance of operations, placing large importance on technology infrastructure upgrades. Due to this, the demand for semiconductor chips increased dramatically causing a shortfall in the supply.
Many companies rely on semi-conductor chips to manufacture their products and automotive companies are no exception. Because large companies like Ford and Volkswagen are unable to get their hands on large quantities of semiconductors, manufacturing output has fallen sharply, leading to closures of plants. Out of all the apprehensiveness, a sliver lining occurred.
As the global economy starts to reopen, the demand for new and secondhand cars reached new highs. The increased saving rates mean that more people now have the financial capabilities to buy and finance the purchase of new or second-hand vehicles. However, buyers are finding dealers with fewer and fewer models available for sale. Why? – Semi-conductor shortages coupled with hiked-up demand.
With a lower amount of cars being manufactured, dealers are having less to sell. With soaring demand, prices for automobiles have increased. Out of all this uncertainty, large manufactures realised that they can reach higher levels of profitability with lower levels of inventory in stock. So much so that Ford registered record-breaking pretax earning in Q1 2021 of $3bn.
“I want to make it extremely clear to everyone. We are going to run our business with a lower Inventory supply than we have had in the recent past because that’s good for our company and good for customers.”CEO of FORD Motors.
Should Large auto manufacturers be able to juggle the right amount of inventory as the semi-conductor shortages start to ease, then automakers could be witnessing increased profitability levels for years to come.
Hospitality, Entertainment & Travel Sectors.
As the hassles of traveling start to ease, hospitality, travel, and entertainment sectors could strongly bounce back.
Each of these industries have not recovered to their pre-pandemic operating levels and therefore poses as an opportunity should we return to normality and full capacity.
Examples of these stocks would be:
- Disney — Entertainment;
- Expedia and Airbnb — Travel and hospitality bookings; and
- Hilton, Marriott, and other hotel names — Travel and hospitality.
Irreversible Covid-19 Trends
It would be foolish of any investor to think that the occurrence of the Covid-19 pandemic did not bring about any implications to the ‘longer-term scope of things’. Certain trends could be irreversible.
Our dependence on technology has come to light throughout the pandemic. For example:
- Ever growing dependance on Data and Cyber security;
- Ease of E-commerce and E-shopping;
- Ease of transferring payments through the use of contactless technology;
- Social and digital platforms forming part of our lives ever more than before;
Despite this article being mainly focused on so-called recovery stocks, the occurrence of the Covid-19 pandemic only accelerated the inevitable adoption of certain technologies sling-shooting technological industry growth a couple of years into the future.
Watch the Bond Yield Movement
The 10 year Bond yield curve can have significant implications on the stock market should the value of these bonds increase. Check out this article to get informed on this — https://investmenthub.medium.com/three-important-things-everyone-should-be-looking-at-295c87cbb857
The covid-19 lockdowns have led to saving rates to swell, and demand to increase. Generic economic studies show that the more money people have, the more likely people are to increase their spendings. Because people now have increased levels of savings, consumer confidence will come back strong resulting in a ‘honeymoon period’ once the economies start to reopen. This has resulted in pent-up demand for goods and services causing supply bottlenecks as manufacturers and hospitality providers scramble to onboard necessary resources to meet demand.
The fear of an over-performing economy may result in inflation spikes occurring resulting in increased interest rates and increased bond yield rates, which may be detrimental to the stock market.
Keep these key trends in mind the next time you’re investing in stocks!
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Any views or opinions presented in this article are personal and shouldn’t be taken/used as professional advice as we are not qualified financial advisors.
Any statistics mentioned have all been linked to their respective documents together with their ownership.
Lastly, we would like to note that this article has no tie to our professional jobs and was conducted in our free time.