The coronavirus recession: what will it look like and which stocks could prosper?

by Tom Bailey from Money Observer |

While we all know economic growth has collapsed, it is less clear how quickly a recovery will take hold.

The economic outlook for the global economy right now can only be described as grim. Across the world, countries have enforced lockdowns in a bid to slow the spread of coronavirus. With consumers staying at home, demand for goods and services has fallen, while many businesses have had to temporarily halt operations. The resulting economic contraction is expected to be the worst since at least the Great Depression.

The question, however, is what shape the economic downturn and eventual recovery will take. While we all know that production has collapsed, it is less clear how quickly a recovery will take hold.

According to Marc Pullen, senior equity analyst and Dan Thomas, international equity analyst at Canaccord Genuity Wealth Management, at the start of March most economists assumed any economic downturn would take on a V-shape. This means that while the downturn will be sharp and painful, once lockdowns are lifted and life returns to normal, the economy will quickly bounce back to roughly where it was before the crisis.

Many economists, however, are now not so optimistic. Pullen and Thomas note: “A few weeks into these social isolation measures – and from witnessing the decimation of many industries such as leisure and hospitality, high street retail, air travel and oil and gas – those initial predictions are being questioned.”

They continue: “With economic performance indicators plummeting in countries around the world, applications for unemployment benefit soaring, economists are starting to think economic recovery might not be so swift.”

As a result, the working assumption of many now is that the economy will take on more of an “L-shape.” This means that economies around the world will suffer the anticipated severe recession but instead of seeing a strong bounce back economic activity will flatline. “This is the most severe of the different types of recessions, as it could take years to return to trend line growth,” Pullen and Thomas say.

Time will tell which shape the economic downturn will take. But what does this mean for investors? As always, certain stocks can often be expected to perform better in certain economic environments. Pullen and Thomas below provide a selection of stocks listed in both the US and Europe (ex UK) they believe are likely to do well in each of the two scenarios.

V-shaped scenario stocks

In the list of stocks expected to do well in a V-shaped economic downturn, there is a heavy emphasis on stocks already heavily sold off due to the crisis but with strong enough fundamentals to whether what should be a temporary storm. Pullen and Thomas note these are “stocks that although they will be substantially impacted by the crisis, have the balance sheet strength to manage the crisis and should be beneficiaries of a sharp bounce back in business activity”.

A good example of one of these stocks is BMW. Car manufacturers have sprawling supply chains. The shutdown around the world has led to a shortage of components for car makers, leading many to either slow down or halt production. Added to that, consumers usually delay car purchases during downturns. This means that BMW faced both a reduction in production and a large fall in demand. However, if, as Pullen and Thomas believe, it has a balance sheet strong to survive this temporary economic shock, it should see a strong recovery.

European stocks      
NAME SECTOR P/E +12m 3 month return
adidas Textiles Apparel and Luxury Goods 22.0 -12%
Akzo Nobel Chemicals 15.6 -12%
Alcon Health Care Equipment and Supplies 25.4 22%
Amadeus IT IT Services 18.7 -22%
BMW Automobiles 8.9 -17%
LVMH Textiles Apparel and Luxury Goods 24.0 6%
Siemens AG Industrial Conglomerates 11.2 -11%
Total SA Oil Gas and Consumable Fuels 16.6 -9%
UBS Capital Markets 7.8 -2%
US stocks      
NAME SECTOR P/E +12m 3 month return
Air Products & Chemicals Chemicals 19.2 10%
Charles Schwab Capital Markets 15.2 -5%
Chevron Oil Gas and Consumable Fuels 72.6 -17%
D R Horton Household Durables 6.7 -19%
JPMorgan Chase Banks 9.4 -19%
McDonalds Hotels Restaurants and Leisure 20.5 7%
Stryker Corp Health Care Equipment and Supplies 17.0 -6%
Ulta Beauty Specialty Retail 13.6 -16%
Walt Disney Entertainment 19.4 -14%

 

L-shaped scenario stocks 

When it comes to an L-shaped recession, where a strong rebound doesn’t quickly materialise, the stocks chosen are companies able to continue generating revenue in tough times. This means the companies provide goods or services that struggling consumers are likely to deem essential and therefore continue to buy. This includes classic consumer staples, such as Nestlé, Roche, and Proctor and Gamble. However, tech stocks such as Amazon, PayPal, and Microsoft are also included, testament to the increasingly vital role these services now play in people’s lives.

However, as well as providing essential goods and services, and therefore an ability to continue generating profit, the companies also all have strong fundamentals in the form of good cash flows and strong balance sheets.

As the size of the two tables show, such companies are much more likely to be found listed in the US than in Europe. However, it should be noted that most of the companies have global revenue streams and should not be seen as plays on the places they are listed. For example, Nestlé actually generates more of its revenue outside of Europe.

At the same time, US listings such as Alibaba and Tencent derive almost none of their revenue from Americans, with nearly all their customers based in Asia.

EU stocks      
NAME SECTOR P/E +12m 3 month return
Henkel Household Products 15.0 8%
Lonza Life Sciences Tools and Services 29.5 59%
L'Oreal Personal Products 29.9 22%
Nestle Food Products 22.3 35%
Pernod Ricard Beverages 19.7 7%
Roche Pharmaceuticals 15.4 43%
US stocks      
NAME SECTOR P/E +12m 3 month return
Alibaba Group Internet and Direct Marketing Retail 28.8 15%
Amazon.com Internet and Direct Marketing Retail 59.9 36%
Becton Dickinson Health Care Equipment and Supplies 18.1 12%
Colgate Palmolive Household Products 22.9 33%
Electronic Arts Entertainment 26.0 28%
Johnson & Johnson Pharmaceuticals 15.2 24%
Microsoft Software 25.5 30%
Mondelez Food Products 18.9 25%
PayPal IT Services 34.5 14%
PepsiCo Beverages 21.0 23%
Philip Morris International Tobacco 13.3 15%
Procter & Gamble Household Products 22.3 25%
Tencent Holdings Interactive Media and Services 31.1 34%
Walmart Food and Staples Retailing 23.0 35%

 

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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