Invest
How 10 sectors are coping with COVID-19
We’ve all heard the COVID-19 crisis is “unprecedented” in the way it has affected economies the world over, so how are 10 sectors faring at the moment? An equities asset manager weighs in.
How 10 sectors are coping with COVID-19
We’ve all heard the COVID-19 crisis is “unprecedented” in the way it has affected economies the world over, so how are 10 sectors faring at the moment? An equities asset manager weighs in.
The head of Australian equities at Nikko Asset Management, Brad Potter, has commented that the COVID-19 crisis and related mass shutdowns are “placing enormous pressure on the earnings, cash flows and balance sheets” of any number of companies.
It’s a tough situation to navigate, with Mr Potter conceding that “given how fast the situation is changing, including government intervention, we expect our views to also change”.
Despite the challenges, the equities expert has provided some commentary on how the current situation is impacting a number of sectors:
1. Banks
Recent government support packages will allow sometime before bad debts ramp up; however, Mr Potter did concede that SMEs “are simply more vulnerable to the shutdown”.
But with the banks themselves having more than twice as much capital as they had going into the GFC and less exposure to property and more exposure to mortgages, “they should get through without raising more capital”.
2. Retail
According to the expert, non-discretionary retailers – especially those focused on home consumption – should do reasonably well.
“Retailers that sell into cafés and restaurants will be negatively impacted, but few retailers are overly exposed to this sector,” he commented.
From Mr Potter’s perspective, the biggest risk that is facing both retail and the banks is a longer form of shutdown.
3. Gaming
“While gaming is perceived to be relatively defensive and gaming revenue in Australia as a whole was still positive throughout the GFC, the impact from the COVID-19 has negatively impacted the gaming sector substantially – more than the broader market,” Mr Potter has said.
In saying this, those within this sector that have diversified into online channels are seeing some offsetting benefit.
This is due to patrons seeking out alternative forms of entertaining while social distancing.
4. Diversified financial
There’s a “saving grace” Mr Potter has credited to keeping the diversified financial sector buoyant during this challenging period.
“Many of these companies run net cash balances, and so have minimal balance sheet risk.”
Therefore, he highlighted that while there is substantial short-term pain, “once markets return to normal (whenever and whatever that may look like), many of these companies will be in a position to move forward”.
5. Infrastructure
While infrastructure stocks such as toll roads, airports and gas pipelines are generally perceived as defensive and “relatively immune to an economic slowdown”, Mr Potter said COVID-19 is “completely changing the way individuals go about their day-to-day routine”.
“To state the obvious, these are not normal market conditions.”
As a result, the equities expert said many of these companies “may need to turn to equity investors to shore up their balance sheet if the debt markets experience a GFC-like freeze”.
6. Real estate
“We expect retail to perform poorly during this period as landlords will pull out all stops to keep vacancy in their centres down – think rent relief or escalated capital contributions as more tenants turnover,” it was outlined.
Mr Potter highlighted that “assets with a higher discretionary composition will be hit harder by the COVID-19 crisis, with the effect of flowing directly into rental income as well as ancillary income such as car parking and advertising fees”.
In saying this, Mr Potter did suggest industrial should still hold up fine, while the trend towards e-commerce looks likely to continue.
7. General insurance
Mr Potter is expectant of general insurance being “somewhat defensive in this current environment, as it has during past economic downturns”.
“Commercial insurance is not quite as defensive as personal, because businesses can look to reduce premium costs via reducing the scope of their insurance,” he outlined.
He considered that the building materials sector is likely to be significantly impacted by COVID-19.
8. Oil and gas
Facing “unprecedented” pressure from simultaneous events on the supply and the demand side, Mr Potter explained that “the economic slowdown from global governments curtailing activity in an attempt to slow the spread of COVID-19 will see oil use in air and land transport severely curbed, though the quantum of volume loss is difficult to determine, given uncertainty around the duration of the slowdown in activity”.
He has observed that at current oil prices, most major supply participants are losing cash, or are requiring to either draw down on sovereign treasury reserves or put austerity measures in place to curb the fiscal bleeding.
Looking more long-term, the equities expert said Nikko AM continues to believe that the world requires higher oil prices to incentivise replacement supply from higher-cost conventional sources, such as ultra-deep water.
9. Mining
Mr Potter said the COVID-19 crisis is creating “significant but quite diverse issues for the mining sector”.
He noted that base metal prices are suffering on the weakened and uncertain global economic outlook, while bulk commodities, in particular steel-making inputs, iron ore and coking coal, have held up remarkably well.
“Fortunately, most of the sector has relatively low gearing and should be able to weather current events,” he considered.
“Like the oil sector, the sell-off has seen substantial value emerge from the miners. Most current base metal prices are biting deep into cost curves, which should provide price support over the longer term.”
10. Healthcare
“Although healthcare is typically perceived as being a relatively defensive sector, the reality is that times of economic weakness do impact demand for healthcare services,” Mr Potter conceded.
He observed a decline in GP visits, which will flow-on to pathology and radiology volumes and in time, impact sleep testing and elective surgery demand.
Unaffected areas include life-saving medication and ventilation manufacture.
Looking forward, Mr Potter said beyond a period of weaker demand associated with the current shutdown, “the prospects for different participants will vary according to their exposure to [the] broad] economic environment that results and their reliance on government funding”.
“Certainly, government indebtedness will be higher in most, if not all countries, meaning healthcare budgets will be under greater pressure.”
About the author
About the author
Investment insights
How Aussies can invest like Warren Buffett
Arguably the most successful investor of the modern age, Warren Buffett is still the chairman and CEO of Berkshire Hathaway at 90 years old, and currently has a net worth of over $100 billion, writes ...Read more
Investment insights
Pahari leaves AMP as it pursues demerger
In yet another twist, AMP has announced its intentions to pursue a demerger of its private markets business, a move that has seen it kill off its takeover negotiations with Ares Management and Boe Pah...Read more
Investment insights
Business warned on COVID vaccine policy backlash
Businesses that pressure staff into getting a COVID-19 vaccine are being warned they could face discrimination, harassment, bullying and employment abuse claims, according to an industry expert. ...Read more
Investment insights
5-step guide to teaching kids about money
It’s never too early to start teaching kids about money and how to manage it. With the added challenges associated with COVID, it’s never been more important either! ...Read more
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
Are you being priced out of the market? Have you got the Tuesday blues? And are you ready for the upcoming super changes?
Listen now
Are property prices set to crash? Should you jump on board the fintok craze? And how to prepare for this tax time
Listen now
Dissecting the budget and what it means for your equities, property and super
Listen now
Has the property market reached its peak; Biden’s climate summit and our sharemarket, and the upcoming budget
Listen now
Investment insights
How Aussies can invest like Warren Buffett
Arguably the most successful investor of the modern age, Warren Buffett is still the chairman and CEO of Berkshire Hathaway at 90 years old, and currently has a net worth of over $100 billion, writes ...Read more
Investment insights
Pahari leaves AMP as it pursues demerger
In yet another twist, AMP has announced its intentions to pursue a demerger of its private markets business, a move that has seen it kill off its takeover negotiations with Ares Management and Boe Pah...Read more
Investment insights
Business warned on COVID vaccine policy backlash
Businesses that pressure staff into getting a COVID-19 vaccine are being warned they could face discrimination, harassment, bullying and employment abuse claims, according to an industry expert. ...Read more
Investment insights
5-step guide to teaching kids about money
It’s never too early to start teaching kids about money and how to manage it. With the added challenges associated with COVID, it’s never been more important either! ...Read more
Investment insights
Why ethical investing is at a tipping point
Best-selling author Malcolm Gladwell said it best: “Look at the world around you. It may seem like an immovable, implacable place. It is not. With the slightest push – in just the right place – ...Read more
Investment insights
Ares withdraws from AMP bid as wealth manager’s financial results spell trouble
The bad news keeps rolling in for AMP, with the wealth manager reporting a significant drop in profit as its US bidder, Ares Management Corp, announces that it is backing out. ...Read more
Investment insights
‘RBA not responsible for asset prices’, governor says
RBA governor Philip Lowe has said that the Reserve Bank is not responsible for targeting asset prices, after questions were raised about the creation of raging bull markets against the backdrop of l...Read more
Investment insights
Retailers report strong HY21, with Super Retail set to refund JobKeeper
Certain Australian retailers are flourishing despite the government-mandated temporary store closures in 2020, with JB Hi-Fi reporting good sales growth and Super Retail Group pledging to hand back $1...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
