The winners & losers of the Covid-19 crisis, and where you can find them

The coronavirus crisis is redefining corporate resiliency as the global economy is tested in unparalleled ways. But the crisis is also providing a rare opportunity to test basic presumptions of sustainable investing, according to James Rich, Senior Portfolio Manager at Aegon Asset Management.

“While few areas were left unscathed, we’ve found that our thesis of investing sustainably has generally held up well during the pandemic and market fallout. Within corporate credit, many of the sectors with a greater focus on sustainable products and services have demonstrated resilience.”

“Sectors with many issuers that meet our definition of sustainable, such as healthcare, including pharmaceuticals and biotechnology, are clear beneficiaries of the crisis as they work to combat the virus. Technology and communications have also weathered the downturn relatively well given a spike in demand during quarantine. But there are certainly some sectors that benefit from sustainability tailwinds, such as automotive and commercial real estate, where the outlook is cloudier. Meanwhile, industries such as energy and leisure with very few (if any) issuers that meet our definition of sustainable have suffered amid plummeting demand.”

But as the crisis unfolds, will the shift toward sustainability persevere? Rich remains convinced that the long-term secular sustainability shift will persist well beyond the crisis. “While we acknowledge that some sustainability initiatives may stall in the short-term as companies re-evaluate their capital expenditures, we believe the pandemic could be a pivotal point for the sustainability movement.”

Rich continues to explain that many of society’s greatest lessons and innovations have risen out of tragedy. “The pandemic has been a wake-up call for companies. The crisis has exposed weak supply chains and poor labor management practices, requiring companies to quickly adapt their business models to survive. We expect many companies will reinvent themselves and emerge from the crisis with a greater focus on sustainability as they take into account the societal and environmental ramifications of their products and practices.”

Below we outline our view of corporate credit sectors related to our sustainability-themed investment strategy and their likelihood to emerge as winners and losers.

Positioned to win

Tech: As people around the world are stuck in their homes, demand for many technology products and services has spiked. With the uptick in demand, companies with technology solutions including energy-efficient cloud services are currently at a premium.

Communications: Firms that support the wireless and internet value chains are benefiting from the quarantine efforts and work-from-home environment. The need to provide communications through wireless and the internet is even stronger now than before the crisis.

Pharma and biotech: For a sector that until March was often perceived as an enemy of the people due to the ongoing opioid crisis and rising drug costs, sustainability has to an extent come to the sector’s rescue. The need for new cures for diseases like Covid-19 is more in focus than in recent years, reaffirming the critical importance of innovation and sustainability within pharmaceuticals.

Food and beverage: Food and beverage sales sold through traditional grocery and supermarkets has spiked as people shift consumption habits from a mix of at-home and eating out to almost entirely at-home. Sales of healthy food products have risen too.

Positioned for mixed results

Housing construction/building materials: Regardless of how affordable a new home is, few consumers are even touring new affordable homes. Renovations of existing homes have slowed, suggesting the demand for energy-efficiency-enhancing building materials has declined as well. That said, many markets had existing shortages that will not go away just because of the crisis.

Financial services: Given the disproportionate impact of this recession, the need to support SMEs is more pressing now than ever. Financial firms that emphasize provision of support to SMEs before the crisis may see larger increases in losses and more lost revenue. But providing support to these firms may prove to be profitable when the economy recovers.

Power: The demand for electricity is cyclical, and the current recession is no different, whether or not the electricity is generated from renewables. That said, the long-term transition to low-carbon energy will persist, supporting the decline in cost of renewable power.

Industrials: Many industrial sectors, including those that sell sustainable products and services, are highly cyclical. The need for environmental services will decline alongside industrial demand. Meanwhile other areas, such as paper packaging, are experiencing an uptick in demand.

Positioned to lose

Automotive: Big ticket consumer spending is taking a hit. Cars and parts are no exception, regardless of whether they’re electric, hybrid, or internal combustion engine-powered. US seasonally adjusted annual rate (SAAR) is expected to decline to 12-14 million for the next 12 months.

Commercial real estate: The need for commercial real estate has dropped amidst stay-at-home mandates. Sectors such as hotels and retail will likely take years to recover, and others such as offices, may be changed forever as firms realise the value of offering employees greater flexibility.