Rebecca Chesworth, Senior ETF Strategist at SPDR, has commented that healthcare is currently the most attractive sector for investors, with further opportunities to be found in Technology; Communication Services; Consumer Staples and Utilities.
Chesworth says: “First Quarter earnings results in Health Care came second to any announcements about hoped-for vaccines or medicines for Covid-19. There has been positive news from several Health Care companies in terms of their anti-viral treatment, Covid-19 vaccines and reports of promising research and trials. Many companies have ramped up testing and their search for vaccines and a cure for Covid-19. Diversification – buying the whole sector – is key to capturing the potential winners.”
In terms of technology, SPDR says the sector offers a range of near-term attractions but has also started to look better from a long-term perspective. However, it warns investors cannot ignore the threat of geopolitical interference: threats of reigniting a trade war could hang over tech and its global supply chain.
While IT spending could increase in support of data ambitions, new infrastructure and technologies, SPDR says the sector could become more volatile.
Turning to communication services, SPDR says the sector shares many themes with Technology, and the habits of businesses and consumers learned during this current crisis could drive long-term growth prospects. “Trends on social media and subscription services benefit the largest stocks in this sector. As business activity collapsed, there were initial fears that internet giants, namely Facebook and Alphabet, would gain users but suffer lost advertising revenue. However, SPDR says it appears now that advertising share has increased for digital.”
SPDR says many behaviours have changed in the Covid-19 era, among them a stronger connection between the producer and the consumer. “Moreover, more consumers have discovered the convenience of the e-commerce channel. Consumer Staples could see persistent benefit at the expense of some Consumer Discretionary companies.
Consumers have moved beyond panic buying, but categories such as food, tobacco and hygiene have remained resilient due to the lower elasticity of demand for their products. Beverage manufacturers and food service providers have not had such an easy time.”
Chesworth says: “As always with the sector, we need to watch margins, which could suffer as consumers buy basics, and not luxuries, in response to lower earnings or unemployment. Meanwhile, higher logistics costs and supply chain disruption will also threaten profits. However, costs could be clawed back from a cut in advertising and promotional spend, which is happening across staples industries and therefore not necessarily at the expense of market share, lower input costs – including oil – and product rationalisation.
“The sector’s low beta, low volatility and low sensitivity to bond yields, provide a defensiveness that could be welcome in a worsening economic scenario.”
SPDR says Utilities were left behind in the bear market rally of April, and now their performance has largely decoupled from historical rate correlation. The sector has always been known as a bond proxy and seen as somewhere to hide if interest rates fall sharply, the firm says.
Chesworth comments: “The sector retains one of its traditional attractions: high dividend yield, now at a higher premium to the rest of the market. MSCI World Utilities has a forecast yield of 4.1 per cent this year, almost 70 per cent higher than the market average and with a much more comfortable earnings cover.
“The Utilities sector could emerge relatively unscathed by the COVID-19 crisis. Electricity and gas provisions are relatively resilient, as regulated utilities recover fixed costs through charges set by regulators and pass fuel expenses on to customers. During the limited economic activity levels during lockdown, companies have reported that commercial and industrial use is down, but residential demand is up, which is helpful as residential prices can be 25 per cent higher.”
In conclusion, Chesworth says: “There is always a sector to buy. In all market environments, certain sectors offer the opportunity to play the dominant themes and appeal to investor sentiment. While we have seen necessary policy support and effective response to virus controls, the path to health and economic recovery is still uncertain. Our favoured sectors continue to be those that are either defensive or have the potential to be less affected by the COVID-19 crisis.
“While it appears that COVID-19 infection rates have peaked, and economies are starting to reopen, the recovery trajectory remains uncertain. Reoccurrences of the virus appear fairly likely, which would necessitate keeping or re-imposing physical distancing measures. As such, we anticipate a delayed recovery with bumps along the road, as economic damage could be greater than initially feared. Against this backdrop, we see opportunities in defensive sectors and those that stand to benefit from the ‘new normal’ brought about by Covid-19.”