The (Un) expected

Nobody would have expected the year 2020 to bring about such turmoil and distress in our lives and the world economies alike. As the novel corona virus, later named Covid-19, emerged in China in November 2019, many countries underestimated it. The situation changed as soon as the virus’ epicentre shifted from Asia to Europe.

Fear, uncertainty, as well as the various mitigation measures, particularly travel restrictions and lockdowns introduced around the globe, had a significant impact on investment markets. In light of the interdependence between industries and economies, it was not only the industries and sectors in the direct line of fire that were impacted.

Energy is a sector that links all industries together and this is the main reason as to why it was the worst performer for the year. Year-to-date, the S&P 500 Energy Index as well as the MSCI Europe Energy Index are both over 35% down. The fall in demand together with the price war between Russia and Saudi Arabia earlier on in the year, negatively impacted the price of oil, in turn affecting the performance of players in this industry.

While the gas industry was not drastically impacted as the oil sector, the overall reduction in energy demand has still left its mark.

The sharp drop in energy demand coincided with a substantial drop in investment in the sector, while renewable energy investments increased. In fact, Moody’s figures showed that sustainable bond issuances exceeded $228.2 billion over the first three quarters of the year – 24% higher than the corresponding period in 2019.

On the other side of the coin, technology emerged as the biggest winner in this pandemic. The performance was however very different between the US and the Euro area. At the time of writing, The S&P 500 Info Tech Index registered an increment of around 40% year-on-year while the MSCI Europe Information Technology Index increased by just over 11.6%. The big tech companies, a good number of which are found in the United States, are definitely the primary reason behind this difference in performance.

There are numerous considerations that can be done when trying to explain the extremely positive performance experienced by tech stocks. This performance can either be considered as speculative, irrational and unsustainable — driven by a mania for technology stocks especially by the younger generation or as a rational response to a severe economic shock experienced and the resulting likelihood of low interest rates for a long time.

It is also logical to think that if investors place a higher value on these companies’ profits, this means that they do not expect increased investment and competition to erode them. In summary, they see these tech giants enjoying monopoly profits for the years to come. This is plausible, as barriers to entry are now extremely high for start-ups to infiltrate and therefore could hinder new investment by other market players.

Although one could possibly argue that the top and worse performers were expected to be as outlined in this article, other sectors have definitely exceeded expectations. Consumer discretionary is definitely a good example, with the automobile industry being one of the primary beneficiaries. The MSCI World Automobile Index has registered a 70.5% increase year-to-date. This possibly comes as a surprise when considering that the end of quarter one was characterised by fear of rocketing unemployment levels and lower disposable income levels. Without any reason of a doubt, some industries have been terribly hit and jobs were lost and income levels reduced, but in other sectors, this was much less than feared. One of the possible reasons as to why demand for automobiles remained strong is that people sought to purchase their personal means of transport in order to avoid public transport and risk contracting the virus.

Elsewhere, Black Friday sales figures have also been much better than expected with online shopping surging. Apart from the fact that purchasing from home has become the preferred way of shopping for many individuals, the reason behind this could also be explained by the fact that people looked forward to pamper themselves with purchasing items that would make them feel better. Moreover, the numerous restrictive measures introduced around the globe at different periods has definitely yielded some level of reallocation of expenditure from entertaining practices to retail.

Surprisingly, real estate is another sector that is worth mentioning. Despite the S&P 500 Real Estate Index being around 6.5% down year-to-date and the MSCI Europe Real Estate being slightly less than 16.5% down, the recovery has been positive. The US based index shows a recovery of 3% points over the past six months while the European index recouped 6.6% points over the same period. Potential reasons behind this partial recovery in the sector are; the fact that individuals have spent an abnormal amount of time at home in this pandemic and this has therefore triggered the financially stable to consider buying a larger property and, real estate could have been considered as the ‘new safe haven’ asset to buy in time of heightened volatility – by making use of savings and benefitting from low interest rates.

This performance is worth mentioning particularly when considering the expenditure incurred when purchasing, developing and managing real estate, especially at times of economic slowdown, as well as the concerns surrounding commercial property. This is because businesses are looking at alternative operating models experimented in this pandemic, to remain in place for the foreseeable future. Having a number of employees working remotely would definitely reduce the footprint required by businesses and thus, slow down the commercial real estate industry.

Same as these sectors registered contrasting fortunes in this pandemic, other sectors have also bagged very positive or highly negative results. This goes to reinforce my belief that diversification is key for peace of mind in investing. Although speculation could very well benefit the investor on sporadic circumstances, it could also bring about extremely negative consequences to one’s portfolio, especially in instances when the unexpected happens.

David Baldacchino, MSc Wealth Management (Edinburgh), B.Com (Hons) Banking and Finance (Melit.), DipFA, is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]