Picking companies set for impressive growth and avoiding those with poor prospects is never easy, but the COVID-19 pandemic has made this harder. Rob Griffin talks to several analysts about what to expect.
The outlook for different industries and companies is constantly changing due to uncertainty caused by the coronavirus pandemic.
Unfortunately, even firms operating in the same sector face differing prospects, depending on their customer base and business models.
Over the last year, the blue-chip FTSE 100 has been all over the place, fluctuating between a high of 7,727 points and a low of 4,898 points.
At the time of writing, the index is around the 6,000 mark.
In this article, we look at how some sectors have been affected by the pandemic – and ask the experts which stocks have the best chance of decent long-term returns.
It’s worth flagging that this is only speculative, and we recommend you do your own research before investing.
‘Unprecedented dividend cuts’
The lockdown has badly affected many industries with a string of household names, including BP, Centrica, easyjet, Virgin Atlantic, and P&O Ferries recently announcing large-scale redundancies.
There have also been unprecedented cuts in dividends during the second quarter of 2020, with 176 companies cancelling them completely, according to the Link Group’s Dividend Monitor.
Susan Ring, chief executive officer at Link Group, says there’s no doubt that 2020 will have witnessed the biggest hit to dividends for generations.
“The cuts have been made to protect balance sheets in the face of horrendous disruption to trading and to the economy,” said Ring.
Unfortunately, there’s also no quick fix. In fact, Neil Hermon, manager of Henderson Smaller Companies Investment Trust, predicts it will take until 2022 for earnings to reach last year’s levels.
“While markets have recovered since the lows of March, we don’t really know what the full impact of coronavirus will be – and this will be the case until at least the end of the year,” commented Hermon.
Stocks that quickly bounced back
One piece of good news for investors has been how rapidly some stocks have bounced back from the devastating stock market fall in March as the COVID-19 pandemic resulted in lockdowns worldwide.
Premier Foods has been the biggest gainer, with its share price soaring 345% in the four months since 23 March, according to interactive investor.
Richard Hunter, head of markets at interactive investor, believes the business, whose brands include Mr Kipling, Bisto and Batchelors, has benefitted from stockpiling and stay-at-home cooking trends.
“The company has posted 11 consecutive quarters of UK growth, helped in part by a relaunch of Mr Kipling in 2018,” explained Hunter.
BATM Advanced Communications and Tullow Oil both enjoyed returns of more than 200% in the period, while William Hill and Halfords each returned 187%.
Key trends to consider
The world was changing fast before COVID-19, but the pandemic has accelerated some trends, according to Tom Stevenson, investment director for personal investing at Fidelity International.
One is the potential end of the nine-to-five commute.
“The ease with which work could be transplanted from office to home surprised many,” commented Stevenson.
“For some, work will never be the same again.”
While the death of the office has probably been exaggerated, he suggests the new approach to working will be more flexible and varied.
“Related to the implementation of new ways of working is the rapid adoption of a range of new digital tools,” he said.
'Less capital intensive, more digital'
Nick Hyett, senior equity analyst at Hargreaves Lansdown, believes the picture is very unclear with every industry wrestling with short and long-term challenges.
“You have sectors that are benefitting from the current scenario and others that are being absolutely hammered,” commented Hyett.
“However, this is largely reflected in the valuations.”
He suggests it’s a balancing act between snapping up potential bargains and running the risk of buying into a company that has been badly wounded.
“A company may benefit from an increase in demand but it’s likely that their customers will be spending less in six months than they are today,” he explained.
He predicts an entirely different looking economy in five years’ time.
“It’s going to be less capital intensive, more digital, and probably less focused on natural resources,” said Hyett.
“There was quite a big shift going on anyway and this has just accelerated that process.”
Now, we’ll run through different sectors and explore their outlook.
Grocery sales have been strong, with online operations having enjoyed a particularly welcome boost as customers heeded the UK Government’s warnings to stay at home.
The stockpiling and panic buying seen in the early weeks of lockdown has already translated into impressive year-on-year growth for all the major players.
But grocery sales have been partially offset by the increased costs associated with making the stores ‘COVID-safe’ and limits on customer numbers.
While analysts expect customers will continue shopping at supermarkets, the competition will continue to remain tough and margins aren’t expected to return to historic levels anytime soon.
Certain sectors are better placed to emerge stronger from the crisis and one of these is technology, according to Stevenson.
“A handful of familiar tech names, such as Apple, Microsoft and Amazon, now account for a quarter of the value of the S&P 500 index,” he said.
So, these companies have helped drive the recent stock market rally.
“These companies have been beneficiaries of the new world of working from home and the need for greater online connectivity,” added Stevenson.
But they all have short-term challenges, points out Hyett.
“Amazon is spending $4 billion on coronavirus costs, while Facebook has something of a reputational issue at the moment,” explained Hyett.
However, they’re seen as long-term structural winners.
“Despite the fact those shares have performed relatively well, I don’t think they’re horribly expensive,” commented Hyett.
Of course, technology covers a broad area, including software.
Andrew Merricks, fund manager at 8AM Global, believes software is a dominant force as it’s critical to how most companies operate.
“Software is more subscription based, which adds to its must-have rather than like-to-have characteristics,” he said.
“Successful software companies are extremely cash generative.”
Elsewhere, Joe Healey, investment research analyst at The Share Centre, likes Experian, the credit data group that has diversified itself across a number of sectors.
“Its importance in the new age of data analysis is vital to business models as companies continually look to improve efficiencies, even more so in the current climate,” commented Healey.
Demand is on the rise for healthcare products and services with global spending projected to reach $8.7 trillion in 2020.
People are anticipated to continue buying healthcare products, even in uncertain times, while innovation will play a big part in ensuring better provision at lower costs.
AstraZeneca, the pharmaceutical giant, is one stock favoured by Healey.
“Aside from the structural drivers supporting the industry, it benefits from significant emerging market exposure where the healthcare market is growing,” he said.
Healey points out that around 20% of the group’s sales are exposed to China, which opens up other opportunities as they look to continue expansion in the region.
“We remain reasonably confident in the longer-term sustained growth for the company as long as COVID-19 is not prolonged,” stressed Healey.
Thousands of planes were grounded for months – and there’s still a question mark hanging over the viability of international travel amid fears of further outbreaks of coronavirus.
It’s not a favoured area for Hyett.
“Airlines are still a tough place to be,” commented Hyett.
“It’s hard to see how the global airline industry returns to normal quickly.”
While the likes of easyJet and Ryanair had expected to benefit from a growth in international travel, this is now under threat.
“The long-term investment opportunities may not be there,” warned Hyett.
Another issue concerns the costs involved, such as servicing debt. Hyett suggests this could mean companies returning cap in hand to shareholders.
Even if this doesn’t happen, their cash reserves will be run down.
“When things are better and profitable again, a lot of that cash will be tied up rebuilding the cash buffers they need,” he added.
Factors likely to drive demand for miners include climate change, fiscal expansion, historic low valuations of certain asset classes, pressure on the US dollar, and stronger balance sheets.
Rio Tinto is well capitalised enough to weather the current crisis, according to Healey.
“Following Chinese growth moderation back in 2016, Rio Tinto was one of the companies that cut back on costs and realigned its business,” he explained.
Healey points out that the latest second quarter production update looked encouraging as iron ore production increased by 3% thanks to a relatively resilient Chinese economy.
A major downside of the pandemic has been the effect on bricks and mortar retailers – at a time when the sector was already struggling according to Stevenson.
“The coronavirus provided a shock from which many familiar names will not emerge unscathed,” he warned.
The sector is up in arms at the way in which Chancellor Rishi Sunak’s Summer Statement seemed to pass it by in favour of hospitality and tourism.
“Excessive business rates and the tax treatment of online rivals give the sector good reason to grumble,” added Stevenson.
Pubs and restaurants
There’s a mixed outlook for pubs and restaurants, although the share prices for some of the major players are looking fairly depressed, according to Hyett.
“Pub groups have been really hard hit with revenues having fallen to zero for three months,” he said.
“They are very subdued, with higher operational costs, but look comparatively cheap.”
The most obvious issue is around the impact on city centre pubs as more people are working from home rather than trekking into the office.
“They will probably still be in demand but may have to change their offer slightly from after work pints to being more of a destination pub or restaurant,” commented Hyett.
Over the short-term, the lockdown has been bad news for bookmakers with sport having effectively ground to a halt for months.
Also, people have been struggling to place bets in store as they have been shut for an extended period.
Yet Hyett sees plenty of positives.
“The longer-term opportunity is the opening up of the US market,” commented Hyett.
“They’re all desperately fighting for a slice of what will be an extremely valuable pie.”
Ivor Jones, an analyst at Peel Hunt, likes GVC Holdings in this space. It’s a sports betting and gaming group, which is already back to positive cash flow overall and has the potential to grow in the US.
The information included in this article does not constitute regulated financial advice. You should seek out independent, professional financial advice before making any investment decision.
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