The rallying market has made a 30% comeback since the March 23rd lows. Magellan, a global investment firm is cautious. With so much elevated uncertainty in the market they’re staying cashed up at 15%, the same level as March.  

“We have adopted an even more cautious than usual posture” stated Magellan’s Portfolio Manager Chris Wheldon and Head of Infrastructure Gerald Stack in a recent analysis report.  “We’re increasing cash and increasing exposure to those businesses and sectors that we think will be most immune to both the initial shutdown period and the recessionary period that we expect to follow” they added.

With so much uncertainty in the market, it’s a challenging environment to invest in and many investors are asking themselves where the opportunities are.

“There are clear behavioural changes happening because of COVID-19. So, some sectors will be less affected, or may see a faster recovery than the GDP growth. Others may get hit because the underlying businesses are hit, which will mean their recovery will be longer,” said Sanjeev Hota, Head of Research at Sharekhan by BNP Paribas.

Long recovery ahead for travel adjacent industries

When the crisis encouraged Warren Buffett to divest from airlines, it signalled long-term turbulence ahead for the airline industry. 

Airline companies are going into administration, including Virgin Australia. Thousands of jobs have been lost and the industry needs USD $200 billion in financial assistance. 

 The energy has been dragged along with it. A combination of falling demand, low prices, and non-payments mean energy, especially fossil fuel, has experienced the biggest investment slump in history. It could plummet USD $1 trillion this year.

Bricks-and-mortar could topple after stimulus 

According to retail expert Dr. Louise Grimmer, many underperforming “zombie businesses” are propped up with economic stimulus that could topple when it’s lifted.

Traditional retail was already doing it tough before the pandemic. Now that Wesfarmers is shutting 167 Target stores, it looks like COVID-19 has accelerated the already downward spiral of bricks-and-mortar retail. 

Resilient, future-focused businesses 

Roughly 70% of a company’s true present value comes from the earnings it should accrue over decades, not yesterday or tomorrow. 

Investors should look out for companies that can chug along and keep their debts manageable. Companies like this are rare, but they do exist, especially those that can cater to long-term behaviour shifts.

Ecommerce’s Amazon strength 

Ecommerce platforms have been doing well in the pandemic as people have been shopping online, even for essentials they’d typically buy in-store. In 2020’s first quarter, Amazon’s revenue was USD $75.4 billion and their sales were up 29% compared to the same time last year. Could this be a tailwind? Given consumer behaviour has been trending towards online shopping for years, it seems unlikely.

Leaders in diverse digital transformation

Companies that provide digital transformation products and services for the workplace, supply chain, and home should do well. Google and Android’s parent company, Alphabet, is an inimitable example. Last quarter, it reported $115 billion in cash and 1 billion users.

Alphabet is well placed because of its captive market. Businesses pretty much have to advertise on Google these days. With 50% of all ad spend going to digital (and growing), this is a strong revenue stream for Alphabet. Because Alphabet is a diversified company with hundreds of products and services on offer, it’s resilient even with the temporary drop in ad budgets.

In uncertain times, Insurance is key 

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Sources:

• Fortune: Which companies’ stocks will thrive after the coronavirus crash?
• Economictimes: Post-lockdown: Which sectors will bounce back, which will take time, experts weigh in
• ABC news: Business collapses to accelerate as coronavirus crisis drags on, experts warn
• ABC news: Rally for major bank stocks leads Australian shares higher, Wall St jumps
• ABC news: Virgin Australia offered $200m coronavirus lifeline by Queensland Government
• Livemint: Stocks in these sectors may take longer to rebound after covid-19
• Livewiremarkets: Magellan stays cashed-up amid elevated uncertainty
• SmartCompany: Target to close or convert up to 167 stores in mammoth restructuring of Wesfarmers’ department stores
• Livewiremarkets: Why is the market rallying?