As the effects of COVID-19 ripple around the world, we are having a significant impact on our daily life by adopting to a new normality.
People are embracing new ways and strategies in their lifestyle. We have seen a quick shift to digital shopping and delivery by developing new habits through which products and services are being offered. Buying behaviours are changing. Things will not be the same as we adapt to a new normality.
In this article, I will go through the best performing sectors during 2020 and the factors that have made these sectors rally during the past few months. Before I actually discuss these sectors, it is important to identify what stage of the economy cycle we are in and what sectors perform best in each economic stage of the cycle. Although this may sound simple in theory, in practice it turns out to be confusing and subjective to identify, especially when analysing the fundamentals and evaluate what should be happening in the current scenario.
During the last three months, within a very short span of time, the market has gone through the bear market, reaching a market bottom on March 23. Since then, we experienced a gradual recovery thanks to the massive economic stimulus governments have provided through fiscal measures and central banks’ actions through lower interest rates and quantitative easing.
In addition, markets rallied further as economies started to reopen and on the hope that the negative impact on economies will not be as bad as initially expected. While the earnings outlook remains challenging, investors seem to be overlooking the COVID-19 hit on fundamentals with the expectations for a swifter 2021 recovery.
The sectors which have, in fact, rallied during the past months are technology, consumer cyclicals or discretionaries and healthcare. Technology, consumer discretionary and healthcare are the three sectors which are currently enjoying a positive performance for the year 2020.
On the other hand, utilities and financials are still underperforming since the beginning of the year by around three and 14 per cent respectively.
The information technology sector has outperformed all other sectors and is trading close to February highs. The disruption caused by the pandemic has benefitted technology stocks as citizens have been working remotely, spending more time on social media and turned online to buy essential and non-essential products.
From a business perspective, many companies have increased IT spending on security software and hardware in order for organisations to make sure they have the infrastructure in place to work remotely.
We have also seen an increase in demand for communications and networking to install 5G equipment, thus enhancing the speed and the bandwidth required to meet the influx within such a short period of time.
The second best performer was the consumer discretionary sector which was among the worst hit in the midst of the market sell-off. However, it has since late March recovered all lost ground and surpassed the levels reached in February. It is interesting to point out that this sector includes products and services that are considered to be a luxury more than a necessity and tend to perform well when the economy is growing.
With all the changes COVID-19 brought along, consumers are learning to cope with uncertainty and their buying behaviour became unpredictable. As each country adopts new ways of grappling with the current situation, we have noticed an increase in confidence levels which led to higher consumer spending like home entertainment and home improvements through online shopping. Packaging companies, which are also consumer cyclicals, have also done well, especially in areas for food packaging to meet the increase in demand.
The third sector which is back in positive territory is healthcare. With an ageing population and the abrupt developments in biotechnology, healthcare has found itself tested by the pandemic. Apart from the sellers of products like N95 respirators, medical face masks and sanitisers, the pharma and healthcare sectors are definitely profiting, especially on any signs of progress towards a potential vaccine. This was evident for healthcare industry businesses within biotechnology, medical distribution and diagnostic and research. In times of uncertain economic conditions, this sector still performs well given the needs it brings along.
Finally, it is important to keep in mind that such sectors should form part of a diversified portfolio not to be overexposed to one particular industry. While past performance is no guarantee of future results, with the exception of consumer cyclicals, the healthcare and technology sectors had an exceptional performance over the past decade.
With all the research and developments happening, one may not exclude that such sectors will be frontrunners for the years to come.
This article was prepared by Matthew Magro, investment advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company and their clients, are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on 2122 4410, or e-mail matthew.magro@jesmondmizzi.com.