Hindsight is 20/20, but foresight is an acquired skill. The Covid-19 pandemic has given the global economy the biggest facelift in the history of the modern world, or at least since World War II. This abruptly accelerated transformation has impacted economies from a macro to a very micro level both negatively and positively.
Covid-19 brought about anxiety, uncertainty and financial hardship across the globe, as governments and health officials battled to come up with strategic responses to a novel and rapidly spreading virus. Lockdown restrictions were quickly instated, operations from manufacturing to retail were halted, airports and schools were closed, and highways and office buildings were emptied. Hospitals, however, were spilling over. Email inboxes overflowed, online spending skyrocketed, and TikTok became a coping mechanism. Most notably, during this time, beach visits and BEACH (Bookings Entertainment Airlines Cruises/Casinos and Hotels) stocks saw a sharp pullback, as hard travel restrictions were enforced across the world.
Despite all the gloom, there have been several record-setting winners and come-back players in stock markets this year.
On the road to Covid-19 freedom
While it was abrupt and uncomfortable, the change in mobility and social engagement supported demand and accelerated growth of digital solutions for the workforce, education, fitness, retail and even entertainment. Cloud operations, virtual healthcare, and other digitally enabled businesses, or ones that could make the change, adapted their models quickly and found support in this new era. For this reason, global leaders of the digital economy – including some of our house view favourites like Alphabet, Microsoft and Facebook, which dominated the market throughout 2020 – will likely remain supported for the long-term as digitisation remains a dominant theme beyond the pandemic. Conversely, most consumer-driven businesses like the hospitality and away-from-home food industries came under severe strain and remain under pressure amid prevailing uncertainty.
Alas, time heals all moods and market sentiment continues to find support as investors navigate through an ever-flowing stream of economic and corporate earnings road signs that all point to a solid recovery from the 2020 detour. Year-to-date, one of the most dominant themes on the market has been the reflation trade. Reflation simply refers to normalisation of the economy through a short-term uptick of inflation (when prices rise due to an excess of demand and/or lower supply), from a period of deflation (when prices drop due to lower demand and/or abundant supply) as we saw in 2020, to realign prices to their long-term trend.
The reflation trade has been supported by higher inflation expectations and commodity prices, particularly oil, and continued vaccine roll-outs, although there have been bumps along the way with certain countries halting or delaying inoculation programmes due to reported side effects, efficacy issues and other problems.
Overall, expectations for a rebound in demand on the back of increased mobility as lockdown restrictions are eased have supported a surge in oil prices from the lows of 2020 (Brent crude YTD: +28%; 1 year: +225%). This has positioned stocks within the energy sector (+29.4%) as the leaders of the reflation trade followed by financials (+22%), while consumer staples (+2.2%) have generally lagged behind the broader market. Discretionary stocks (+9.9%), meanwhile, found support from stimulus cheques in regions like the US, as well as an improving economy and labour markets.
In general, upwardly revised GDP growth projections, record-low household debt as well as record-high income and savings data, which are reflective of the global unprecedented stimulus measures, have been supportive of growing expectations for a post-pandemic boom as consumers – unconstrained by lockdown restrictions, release their pent-up demand.
Whatever the case, we expect the winners of the post corona-conomy to simply be stocks that benefit from a full reopening of the economy. While the reflation trade may not necessarily detract from non-cyclical players such as tech, economic-cycle sensitive, value, and even small-cap stocks are better favoured in this round. From a sector perspective, we see financials, industrials, materials and energy sectors as the winners, while defensively positioned sectors including consumer staples, healthcare, and utilities could lag. From a local perspective, as is the case internationally, stocks exposed to travel and leisure could be among the leaders here.
Nearing the end
Uncertainty surrounding the pandemic’s timeline prevails, and investors must continue to thoughtfully look backwards and forwards at how far we have come but also focus on where the latest data imply we are going – all while resurgent global infections as third, fourth or even fifth waves continue to blur the forecast horizon. However, what remains encouraging is the way the markets have been able to rebound from the trough more quickly than during past downturns.
The pandemic has brought about unprecedented fiscal and monetary policy support around the world, i.e. changes in sovereign behaviour, but it also necessitated changes in business and consumer behaviour as well. Granted, some of these strategic adjustments were only, and perhaps will only ever be, applicable to the pandemic-driven business and social economy (like the banana bread frenzy of 2020), but some of these changes may well persist as structural behavioural changes even in a post-pandemic world (like maintaining personal space while standing in a queue).
By Sithembile Bopela