by Chee Jo-Ey
THE past few weeks have seen major financial markets in havoc as economic activities took a major step back due to the coronavirus pandemic.
This seems to have affected all asset categories with some even wondering if there is any safe haven at all. At times like this, it may be worth exploring which sectors or industries could potentially weather the storm of this pandemic.
iFAST Capital Sdn Bhd assistant portfolio manager Jerry Lee Chee Yeong says, “Traditionally, investors will look into the defensive sectors such as healthcare, consumer staples and utilities. The general perception is that these sectors will usually perform relatively resiliently as the business is likely to go on and demand is unlikely to be affected significantly by the market cycle.
“Although it would be good to have some of these defensive names in the portfolio in such a volatile market environment, investors should also pay more attention to the valuation and growth prospects of other sectors, even including the cyclical sectors especially at this juncture, where prices have declined significantly over the months.”
Biotechnology and healthcare sectors are showing some resilience as they are at the crux of finding the Covid-19 treatments.
Also, at a time when many parts of the world are under lockdown, teleconferencing software companies have also attracted buying interest.
At this current juncture, Lee would encourage investors to add the defensive sectors (with encouraging earnings growth) like healthcare into their portfolio. The global healthcare sector has registered respectable growth over the past 10 years and with the global aging population and the increased health consciousness, the global healthcare sector is likely to continue its strong earnings growth.
On top of that, technology is another sector that investors should not ignore. “The global technology sector has been known for its premium valuation over the past few years. However, the recent sell-off in global equities due to the Covid-19 outbreak has caused global investors to trim their position in the highly-priced technology sector.
“We believe that the global technology sector could be among the least affected ones during the recent lockdowns globally. Hence, investors might want to consider adding some of the global technology exposure into their portfolio,” Lee adds.
FSMOne Malaysia research analyst Shawn Low Tian Hao says,” In general, sectors that would be more resilient during market volatility are those in defensive sectors such as consumer staples, healthcare, or utilities. On the other hand, cyclical sectors such as financial services or basic materials are affected by the condition of the overall economy.
“For example, consumers would still require the goods and services from healthcare companies as well as electricity and water during periods of high market volatility.
“However, it might not be the same for cyclical industries as consumers could hold off the purchase of discretionary items such as real estate, which could affect the demand for metals or cement.”
One of the reasons why defensive sectors tend to be resilient in a volatile market environment is due to the nature of the products and services provided by these sectors. Consumers demand their goods and services regardless of boom or bust in the business cycle, which supports their revenue streams.
While there are various ways to evaluate strong companies, potential investors might be able to filter resilient companies by looking at the financial statements. Companies with robust and diverse revenue streams, strong liquidity ratios, high interest coverage ratios as well as low debt-to-equity are traits of companies that have higher chances of surviving economic downturns.
“In summary, sectors that would do well in an economic downturn are usually involved in producing or providing goods and services that are essential for daily living. The evergreen need for these sectors formulates a steady revenue stream even in a harsh business environment.
“Business owners that maintain a healthy financial profile will be able to reap the fruits of their efforts in times of difficulty, enabling their businesses to have better survivability,” Low adds.
Concurring that companies with healthy finances would win at the end of the day, Affin Hwang Asset Management portfolio manager Lim Chia Wei says, “We do not see meaningful winning or losing sectors when Covid-19 eventually recedes.
“From a different perspective, highly indebted companies may struggle tremendously to service their debt and interest payments. On the other hand, it could be a blessing in disguise for companies with a strong balance sheet because their highly indebted competitors may not survive the temporary economic slowdown.” – March 26, 2020