Coronavirus crash: what stocks could prove resilient if the outbreak worsens?
We have a look at what stocks could prove resilient if European countries have to take more extreme action to contain the coronavirus outbreak - like shutting down transport and encouraging people to stay at home.
European countries are becoming increasingly fearful of the coronavirus as the number of confirmed cases and deaths continues to rise. Italy has become the European hub of the outbreak with over 1,000 cases – ten times more than any other country on the continent. Plus, the 29 deaths in Italy are the only ones reported in Europe so far apart from two in France.
Understandably, other European countries are preparing to introduce tougher measures to help contain the spread of the virus. In China - the epicentre of the outbreak - several cities remain on lockdown with public transport suspended and people being told to stay at home. Industrial activity has ground to halt, schools and workplaces remain closed, and public events have been cancelled.
UK health secretary Matt Hancock has said the government is willing to do the same if the outbreak worsens. ‘Under the worst case scenario we would have to take some quite significant actions that would have social and economic disruption,’ said Hancock on the Andrew Marr show on March 1. ‘It may be necessary to close some schools and other population distancing measures’. The health secretary said the government won’t ‘take anything off the table’ as it considers its strategy.
The negative impact of the coronavirus on the world economy is becoming increasingly clear and it continues to cause severe problems for several stocks and industries. However, some businesses have proven resilient as mobility is restricted and people stay at home. For example, Tencent, the Chinese digital entertainment group that makes games and other content, has defied the wider market and seen its share price continue to rise this year. That is based on theories that Chinese people are buying more online content to keep themselves entertained at home. Similarly, in Japan, where schools have also been shut and people are being encouraged to work from home, companies that provide software to facilitate remote working, like Ascentech, have seen strong gains in recent weeks.
We consider what stocks could provide defensive qualities if European countries have to take more stringent action.
Stocks that deliver
Delivery and logistics companies could have a vital role to play if large numbers of people must isolate themselves or more businesses encourage people to work from home. Getting what they need – from food to everyday essentials – will become harder if they can’t leave the house. This should translate to more online shopping, which means the stuff that is bought must be delivered to the customer’s door. For example, it was reported that food deliveries in China rose 20% year-on-year in January because of the outbreak – however, companies like Meituan, the largest food delivery firm in China, has had to introduce strict controls to allay fears that they could in fact help spread the outbreak further.
There are two types of food delivery companies in Europe. Firms like Just Eat and Delivery Hero (which are currently merging) largely rely on restaurants providing their own couriers, which could prove harder to control, than the likes of Uber, which mainly provides its own couriers to deliver food on behalf of restaurants. There is little doubt that people will order more food online if they are isolated at home, but it is unclear how well the industry will be able to handle it, or whether it would be safe. The nature of the job means couriers come into contact with a lot of people and they could therefore be seen as vulnerable but also as potential spreaders.
Other stocks to consider are big ecommerce players like Amazon, courier services such as Hermes, or a company like Bunzl, which sources and distributes everyday products – including cleaning supplies – to businesses.
Stocks that are highly automated
Automation is one way for a business to avoid a major shortage in labour if the coronavirus outbreak worsens. The less reliant a business is on people, the more resilient it can be in times like these. For example, Chinese firm Luckin Coffee has won attention in recent weeks as it started to trial automated, self-serving coffee vending machines just as the coronavirus outbreak was being discovered. Although companies can’t introduce automation overnight, an event like this could encourage them to adopt it at a faster rate going forward.
In Europe, one stock to watch is Ocado. The company supplies a digital grocery platform and builds automated warehouses for grocery stocks including Morrisons, ICA, Groupe Casino, Sobeys and Kroger. A lockdown in European cities could prove to be a big test for the online offerings of European supermarket chains and they could see an increase in activity if people stay at home. People will still need food and everyday items, but their biggest challenge will be ensuring they have the stock and capability to meet any increased demand online.
Stocks that produce digital content
If people have to stay at home and public spaces like restaurants and pubs close down, then they will be scrambling to entertain themselves. Stocks that provide entertainment in the home, whether it be through online gaming or streaming video and music, should see increased demand.
In gaming, that could translate to higher sales for console makers like Sony, Nintendo and Xbox-maker Microsoft – although some of them have admitted their supply chains have been knocked as a result of the virus. Instead, it may be better to consider stocks that produce the games themselves that can be obtained through consoles, mobiles or home computers, such as NVIDIA, Activision Blizzard, Zynga and Ubisoft.
Then there are streaming staples like Netflix, Amazon and Spotify. The fact Disney is launching its streaming service across Europe in March could also put it on a stronger footing when it comes to securing initial sign-ups.
Stocks that facilitate remote working
Several large companies in Europe have already started to encourage their staff to work from home either as a precautionary measure or after employees came back from travelling with the virus. US oil giant Chevron sent around 300 UK workers home last week over fears that one of its employees could have the virus. More companies are expected to do the same if the outbreak worsens, and this will mean software that helps facilitate remote working will be key.
Stocks that provide vital utilities
People will have to use more electricity, gas and water the longer they stay at home, which means key utility companies will have to meet increased demand, even if it could be offset by lower consumption from businesses.
You can read about the largest water suppliers in each country here.
Other services, like mobile phone carriers and broadband providers, are often bought on fixed contracts, meaning increased demand won’t necessarily translate to sales, but they should remain defensive sectors to consider if the outbreak in Europe gets worse.
Stocks that produce hygiene products
If there is one area that people are already taking more a cautious approach to then it is hygiene and cleanliness. Face masks, hand sanitizer and cleaning products are among the goods that would be expected to see a rise in demand if the coronavirus continues to spread.
That should keep the likes of Reckitt Benckiser on the radar. McBride, which provides own-brand goods, including a large amount of cleaning supplies, to supermarkets and other retailers, could also prove resilient, as could US giant 3M, which has a wide portfolio of products that includes face masks.
Stocks that produce gold
The gold price has soared to its highest level in six years as investors flock to the safe haven amid the coronavirus-induced uncertainty. Gold mining companies and Exchange-Traded Funds (ETFs) are options for investors that want to gain exposure to gold through stocks and without trading the metal itself.
It is important to remember that investing in gold mining stocks is very different to trading gold. The share price of a stock is affected by different variables to that of the gold price. Therefore, investors can consider a gold ETF. The iShares Physical Gold Exchange Traded Commodity provides direct exposure to gold and is one of the largest gold ETFs on the market.
You can find more gold ETFs using the IG ETF Screener.
Limiting the damage
The outbreak has not yet reached its peak, suggesting the worst is yet to come. Investors have already suffered from the economic slowdown spawning from China and should prepare for more volatility and uncertainty in the market.
Some stocks will manage to continue rising while the majority suffers, but investors should be more concerned with limiting the damage to their existing portfolios. Expect downward pressure to intensify in the short term until a breakthrough is made, such as a vaccine being discovered or evidence that the virus has been contained.
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
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