Recently we had the pleasure of hosting our Markets Update webinar with panellists Ryan McGrath, Head of Fixed Income, Guy O’Leary, our London based Senior European Macro Strategist and David Beaton, Chief Investment Officer. It was an insightful discussion on the economic implications of the current crisis and our outlook on markets.
While Ireland started the year in a very healthy fiscal position, the longer-term consequences for the economy are substantial yet still unknown. With massive and opposing trajectories in retail spending and social welfare outlay, we are in uncharted territory. The defensive nature of our exports in key IT, pharma, digital/social media and medtech sectors should insulate us somewhat. The key question however surrounds what form the recovery will take.
We have witnessed the sharpest market contraction since the great depression in the late 1920’s and the global economy is set to shrink. Significant monetary responses from governments and central banks have been swift and should encourage a rebound in growth in 2021.
Sectors Under Pressure
The Standard and Poor’s 500 Index revealed a drop in the energy sector to -42.7% year-to-date, while the materials and industrial sector had seen a huge decline due to China’s lockdown, it stood at -17.5% in mid April.
The financial sector (already facing major structural headwinds) is now under further pressure due to the risk of bad debts. Bad debt provisions set aside in April by the big four US banks amounted to $23bn, and the expectation was to see similar action taken by European banks. For the banking sector, this is a very different crisis. The last recession was a liquidity crisis, this crisis is about profitability.
In the broader market, earnings expectations for Q1 have shrunk to -10%, and for Q2 they have now shrunk to -20%.
The airline sector, as with all travel and leisure-exposed businesses, has been decimated. While there is a positive argument in terms of lower oil prices, the sector needs the global economy to re-open. The strength of Ryanair’s balance sheet however stands out on a relative basis. The company owns most of its fleet, unlike many of their peers. The strongest will often come out on top.
Key Sectors To Watch
The sectors that are doing well are less exposed to the economic cycle and include healthcare, consumer staples, household goods and utilities. Within consumer staples, Johnson and Johnson, defied expectations for Q1 and increased its dividend by 6%, although guidance was lowered for the rest of the year.
The trigger for sector divergence occurred in the last few months, with technology as the stand-out sector. It was down just -6.4% year-to-date as there is greater reliance on technology for communication and entertainment, as there is on services providers such as Verizon, Google and Alphabet. The growth in cloud and in online retail are areas to watch with companies such as Microsoft, SAP, Amazon, PayPal and Apple all still showing strong balance sheets.
It goes without saying that the healthcare sector is also performing well as companies seek out ways to treat and cure Covid-19. Pfizer and Sanofi are two examples.
We have been focused on the renewables space as part of our investment strategy for some time, as there is an upsurge in interest to move away from fossil fuels. We like both Greencoat Renewables and Siemens Gamesa which form part of our Core Portfolio. Both are performing well and paying strong dividends.
So as we continue to move through choppy markets and await the re-emergence from lockdown and a return to some form of normality, clients need to be mindful of diversification within their portfolios. Active management is critical to long term performance and we have investment options to suite all risk appetites.
We encourage you to stay in contact with your broker or portfolio manager as we aim to host another markets webinar over the coming weeks.
Alan Breen is a Senior Stockbroker with Cantor Fitzgerald Ireland.
Contact details for each individual team member can be accessed here on our website should you wish to speak with a Portfolio Manager or Account Executive.
Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up.
