Top Sector Stocks For Coronavirus Volatility

Hi guys, it's Eddie from the desk here in London. Some of you may have not seen me before. I'm actually involved in the other side of Amplify Trading's business, basically covering capital markets. But today we're going to be covering top sector trends. For trading the coronavirus, investing for the coronavirus. So I'm going to be discussing some of the things that I've been watching as it's kind of unfolded over the last few weeks and months, and hopefully you'll take something away from understanding about the different sectors and how they've responded to the coronavirus and identifying some long and short opportunities and some short and longer-term plays. So let's kick into it. So the topics we're going to be covering today, uh, just to introduce myself, here's a picture of me in Frankfurt actually last week covering equity capital markets trading through our IPO simulation for Morgan Stanley in Frankfurt. So that's kind of my day-to-day, going around top investment banks and asset managers and training their analysts and interns. I also deliver our simulation technology all over the all over the world really, at all different universities— LSE, Oxford, Cambridge, ESAD, Frankfurt, all over the world really. So today we're going to be covering the market impact of coronavirus, have a look at the S&P year-to-date performance and the daily performance today. I've actually been sat on the trading floor all day today and it's been a pretty crazy, crazy day. It's definitely been a crazy week, very, very volatile. So hopefully this is going to give you some insight into the movements of the different asset classes and why. We're going to have a look at the typical economic cycle and the impact on the different sectors. We're going to go through an investing checklist for some companies I think you should be looking at, or the characteristics and red flags for some companies that you should be looking at. We're going to discuss the FANGs and some top picks from, from my perspective and what some companies that I'm looking at that that could potentially benefit from this coronavirus, which is obviously kind of a terrible thing to say, where this is a crisis and obviously lots of people are getting ill and dying, which is very, very unfortunate. Of course, there are some companies that you can look at that can take advantage of this, including things like Zoom video conferencing as people kind of work from home. But we'll get into that later. I'm gonna have a look at the Fed policy. I think you can't talk about markets at the moment without discussing the Fed monetary policy decision. I think it was just on Tuesday where they cut 50 basis points, which was very shocking, even though I actually wrote a LinkedIn post, I think 3 hours before, saying that they needed to cut now and cut hard. And I think that's definitely one of my luckier calls timing-wise, where they kind of saw my post I would— I'm sure, uh, and actually then did cut 50 basis points, which was quite shocking, uh, to the market. But given the market pricing, um, that I mentioned in the post, I think it was inevitable and they needed to do it as there was a tightening in financial conditions. We're going to look at some of the, uh, different sectors, so airlines, consumer staples, energy sectors, and some factors that you should be looking out for if you're investing or trading in this environment. So first of all, Let's have a look at the COVID-19 coronavirus impact. There's been 100,000 cases now total confirmed, but one thing that the media kind of don't talk about, and they kind of like to— I don't want to say fearmonger, but there's a lot of 55,000, 56,000 people that have actually recovered from the virus. I think the death rate, or the official death rate, is around 3%. So it is not as bad as the media perhaps are making out to be. It's definitely something we should be watching, and it's having a big impact on financial markets. People are going to get infected. I think that's, that's definitely a reality now. But I actually don't think the mortality rate is, and the death rate is, as bad as maybe people fear. I think people will get infected, but the majority of them will recover. I definitely think the impact of the COVID-19, the coronavirus, is going to be large. It's definitely, in my opinion, going to get worse before it gets better, but I do think it's temporary. So I'll talk a little bit more about this from a company perspective, but I think for a lot of companies there's going to be demand shocks, definitely, but in a lot of kind of scenarios, I think this demand is going to be delayed rather than completely destroyed, and I'll talk about what companies that is and why. But this is a call from JP Morgan just today, and I'm definitely, uh, of the ilk to, to believe this as well. Um, over the last few days and this week, volatility is back. Even today, the VIX was trading at 50, which is quite alarming, and the S&P 500 swung more than 3% 5 times in 8 sessions. I think the Dow also had, uh, the second largest point swing, whereas up 1,300 and then down 1300. So definitely conditions that you should be wary of when trying to, you know, trade in this environment short term. But I think that this could potentially provide some opportunities for long-term investors if you're looking from a portfolio management perspective. Here's the S&P 500 year-to-date performance. So again, quite shocking actually when you think about this has kind of been on the, the kind of news headlines so much in the kind of severe severity of the virus and how it's spreading. But the impact on year-to-date performance of the S&P 500 is shocking when you actually look at it, where we see all these massive down days in the US equity indices futures, for example. But yet Amazon, Microsoft are up, you know, 4 or 5%. Apple, Google pretty much flat on the year. Okay, there has been some severe, uh, you know, uh, price movements for the energy sector. So Exxon is a company that I'm going to talk about later that's been beaten up. Oil has just touched $41 a barrel, quite sharply down. I think it was down 7.5% today, and I'll talk about why that is. But this has definitely had an impact on some energy stocks. Um, the S&P 500 today's performance, so you can see, well, it's a bit of a bloodbath. Google, Microsoft, Apple, Amazon down, you know, 2%, 3%. Again, it's the energy stocks are gonna get hit from this kind of lower oil price as a result of slower economic growth globally and the implications of the virus, lower demand. So it was, I guess, a supply shock, what originated as that. So it would— is it's gonna affect the supply chains of the the tech names like you might have read for Apple, for example, and Amazon. However, it has translated to lower oil prices for oil stocks as well. The traditional economic impact of the cycle on different sectors, I believe we are kind of entering this kind of recessionary phase. But here's just a breakdown of different sectors. So financials, consumer discretionary, technology, industrials, materials, consumer staples, healthcare, energy, telecom, and utilities. And then in this kind of recessionary phase, defensive sectors tend to outperform. So your consumer staples, utilities, telecoms, healthcare, they produce the kind of consumer staples. So your toothpaste, phone services, energy, prescription drugs. Just because we're in a recession, people need their prescription drugs, they need electricity, they're not going to slow their demand, and they tend to do quite well in this type of environment. Utility stocks, I'm going to talk about that just later in this kind of video, but they tend to have higher dividend yields, which can, you know, provide some return for investors as they kind of seek the safety of a, you know, a stable dividend. The underperformers tend to be those kind of cyclical names, so industrials, technology, and those consumer discretionary— think kind of luxury goods, things like that. And as you can see by this graphic, you can see the, the kind of sectors and then the impacts where we get to that kind of late and recessionary phase. Just some names, just so you can kind of put some names to the sectors. So we've got Exxon, of course, down very big, I think down 35% year to date as a, as a result of the kind of factors I talked about— the oil price, the global growth picture slowing down. Boeing, United Technologies, Johnson Johnson, Procter Gamble. These are some big names in the sectors that you can see just so you can put some kind of context to it. Again, then probably more common or well-known FANG names. So Facebook, Amazon, Netflix, Google, etc. Of course, sitting in the kind of information technology and communications sector. And obviously the performances of these sectors tends to differ in this type of environment. I think the essential things that you should be looking at— and I've kind of got a laundry list here— when you are trading and investing in this environment, I think the attractive characteristics of companies that you should be looking for definitely are low-leverage companies, companies with strong balance sheets, those with secular headwind— tailwind, sorry. So things like technology, strong and stable cash flow, their high ability to to service their debt and their interest payments. So high things like high interest coverage ratio, so EBIT to interest expense, high cash flow to debt ratios, things like that. Look for quality companies with strong balance sheets. If this kind of coronavirus epidemic is temporary, which I believe it will be, and a lot of commentators do believe, and fingers crossed it is temporary, this demand is not going to be eliminated. It's just going to be pushed to later quarters and perhaps 2021. So what you need to do is identify companies that are able to withstand this temporary demand shock because they will have a big bounce, let's say, in 6 months' time, hopefully. For example, if the virus then does start to kind of weaken in its severity. The potential red flags, I would say, are highly levered. And of course, this has been emphasized, the amount of corporate debt. Has ballooned just as a result of this cheap money, a.k.a. low interest rates globally. Those companies with weak balance sheets, so low cash, that aren't able to kind of— they don't— they're not very solvent, they're not very liquid. You know, they have weak and kind of volatile cash flow. So temporary demand shocks through revenue and then obviously flowing to their cash flows, they're going to be in quite a lot of trouble. So those companies with low interest coverage ratios, low cash flow to debt, you're going to want to, from my opinion, stay away from. Again, most sensitive, you see it, the travel. So your cruise, cruises, your airlines. So Deutsche Lufthansa expect over the next few weeks, they just announced that they're going to have 50% less capacity over the next few weeks. Those kind of companies tied to large events, and then global growth, uh, definitely. So let's have a look at some of the FAANG names. So the FAANGs, obviously your Facebook, Apple, Amazon, Netflix, Google, um, they represent obviously the most popular and best performing. I think Microsoft and Google, um, names like that were up, up to 90% last year. They have pulled back, uh, and I think from a long-term portfolio management perspective, you should be looking at these names definitely. From a shorter-term perspective, I do believe, in my opinion, they do have some more downside. But if you're looking, you know, if you were looking at these companies in Q4 last year, you know, they had an incredible run. So if you were looking at these names at those levels, some of them have fallen, you know, 20% over the last few days or weeks. So if you're looking from a long-term portfolio management perspective, these could be good times to add to your portfolio. You shouldn't try and time the market. You can— you could get hurt, and you probably will get hurt. Trying to catch a falling knife is gonna, is gonna hurt. But if you're looking from a long-term perspective and you do believe that this virus is temporary, which I do and lots of big commentators do, then these names are going to come roaring back. Their supply chains will be affected and demand will be weaker over these next few months. But from a valuation perspective, they are extremely elevated. If you look at median enterprise value to sales, and if you look historically, these names are extremely rich in their value from some metrics perspective. My top picks. So the coronavirus winners, if you want to call them that. Gilead. So they're actually producing late-stage trials to evaluate the artificial medicine as a curative treatment for the disease. And they've had a really good run recently. Names like Zoom, Zoom and Slack are two names where you've seen that some major corporations, so Deloitte, Goldman Sachs, HSBC, for example, have been saying to their employees, you need to work from home now. So I definitely think companies like Zoom, Slack have really big upside potential. But Zoom, for example, was up a lot last year, so it is very elevated and quite rich in its valuation already. But I do think there is some more short-term upside as people seek to work from home. They're going to need to video conference, they're going to need to communicate with their teams, and Slack and Zoom are two good ways of doing this. Lyft and Uber, they've been really beaten up, and I think this is tied to, you know, if people aren't flying, people aren't traveling, then the majority of their revenues are actually transporting people, of course, around the cities, but also picking people up from airports and things like that. Lyft and Uber had a big bit of a rebound in the second half of last year, but And I know JPMorgan, for example, and some big banks have actually said, you know, they've fallen 20 or so percent this year as a result of this coronavirus, that demand shock. You know, they've got a really good opportunity if you believe in that secular kind of trend that they're obviously participating in. The cloud names, so again, the ones we just talked about, Alphabet, Amazon, Adobe, Microsoft, they all have a lot a large proportion of their revenues being kind of generated by cloud services. So if you believe that cloud services and kind of that kind of technology, technological angle is going to be facilitated during this crisis, these are good names to look at. Another point for Lyft and Uber is the margins that they can generate. If people are not taking the subway or the tube, there could be attractive options for Lyft and Uber, right? So if you don't want to take the tube, you might call an Uber. As that demand potentially starts to rise— and I saw some screenshots of some Uber and Lyft rides, there were actually $160 just from one end of New York to another. This is obviously the surcharges that they're implementing as a result of the demand of people not wanting to kind of take the subway, as they fear that it may— they— it might put them at, you know, a higher risk of, you know, conducting the virus. So these are my top picks of names that I'm looking at right now. Again, Alibaba, similar story, people staying at home. Your Netflix, again, people consuming these at home. Mobile Doctors, for example, that have seen a big kind of lift in China. So people kind of wanting to discuss their symptoms with an online GP. Again, these are names that you should be looking at, or at least I'm looking at. Utilities have had a, you know, remained particularly resilient. So they're the only sector still positive year to date. As you can see from the Euro Stoxx year to date, they're up about 10%. Travel and leisure, automobiles, oil and gas, you know, the biggest losers from this group. And they tend to perform well during recessionary climates. Recession or not, you need energy like we just talked about. And you've seen the top performers, EDF Energy up 34% year to date, National Grid up 10%. The lower yields and the lower yield environment like we've just seen the US 10-year hitting 0.75% or even lower, 0.66% today. German bunds at negative 0.7% today. Investors like the fact that utilities do offer high dividend yields in those kind of highly regulated kind of industries. They do typically offer investors more stable and consistent dividends from that perspective and less price volatility. So this is something, a sector that's kind of outperformed recently relative to the rest of the market. Again, we can't talk about markets at the moment without the Fed This move did shock the market, and this graphic basically indicates when the Fed and Bank of China both cut rates by 50% in the same month. Obviously, there was some tough times that kind of ensued from that. Think dot-com bubble and financial crisis. I think they had no choice but to loosen financial conditions as they were too tight given the market pricing. But again, this has major implications implications for banks, for example. This is going to put severe pressure on their net interest margins, even though the volatility that's ensued at the moment, you know, will, in my opinion, definitely provide upside for trading revenues and trading profits. And the lower rates may actually kind of stimulate a refinancing boom. So think mortgages, for example. If you can refinance your mortgage at a lower rate now, that's going to be attractive. So banks, we're going to talk about later, but this is going to, you know, provide some headwinds for them potentially. This is just a graphic showing the US 10-year that I just mentioned, this gravitational pull towards 0%. I think with the interest rate differentials around the world, in Europe, in Japan, I think this is now a done deal. And I think US rates are heading 2.0%. We saw the biggest one-day drop since 2009 on the 30-year yield. Bunds at 0.75%, negative 0.75%. US 10-year is down 55% in 2 weeks. I think this is a majority of different factors, but I think people reallocating capital from the equity markets to the bond markets, and this is kind of seen this big move downwards in yields, upwards in price. The Euro Stoxx Bank Index, like I was just talking about, stocks, bank stocks in Europe and the US will tend to move with yields, and in this case it's going to be downwards. There's going to be the pressure on the net interest margins. Trading revenues will be up, but central banks, I think, have a mandate to ensure the liquidity and availability of credit for these small to medium-sized enterprises. To ensure that this doesn't kind of— this market, I don't want to say panic, but volatility translates into the financial system. They need the Federal Reserve and central banks across the world need to ensure that there is that availability of credit for small to medium-sized enterprises so they can facilitate the kind of temporary demand shocks to their revenues and cash flows. US banks, like, like I just kind of mentioned, they're not doing much better. The Euro Stoxx Bank Index is down 25% in 13 trading days. And this is definitely mirrored by US banks. They're down around 22% from that February 2020 high. This is all the things I've just been talking about in terms of that kind of the pressure on the banks. Consumer staples. So there are some winners from this coronavirus, like I mentioned in the previous slide. Costco and Kroger actually reported their earnings yesterday, and this is a short-term play on the temporary demand. You know, people are going to these supermarkets and actually hoarding, you know, disinfectant gel, toilet paper. And in their latest earnings results, they actually mentioned that the uptick in demand had a 3% positive impact on the total and comparable sales. So they're seeing a big upside. So these are two names you should be looking at Costco and Kroger up over the last few days, but still I do think if this persists, which obviously will, there's going to be a, you know, a shift in demand, you know, to the near term, quite different to Apple. So like I was talking about, the demand is not going to be eliminated in my opinion for iPhones and iPads, for example. It's just going to be delayed. So there is more short-term pain, I believe, for the FAANG names like Apple due to the supply chain kind of disruptions. But I think that demand will come back online and people will start to demand iPhone 11s, for example, just in later quarters when hopefully this virus has passed. The big trade at the moment, like you've seen, is airlines. So the JET ETF has dropped 14% in the last 15 sessions. It's down about 30%. In the last 10 days, matching the impact of the 9/11 aftermath, which is obviously terrible. Like I mentioned earlier, Deutsche Lufthansa, they've announced that their flight capacity is down 50% in the coming week. So airlines are getting hit quite severely, you know, on this kind of virus. And here's a graphic showing the turbulence ahead potentially for airlines— pardon the pun. The limited spread scenario. So this implies a $63 billion loss of passenger revenues. That's 11% worldwide in 2020. A critical spread of the virus scenario estimates a $113 billion loss of passenger revenues, 19% worldwide in 2020. So I think this is definitely a short-term short. Airlines are going to continue to be hit as a result of this kind of kind of people attending and traveling events, for example, is going to be down. So they're going to get hit. But there will be a point where these airlines, particularly those that are strong with strong balance sheets and cash flows like I mentioned, are going to be resilient, and they will be the winners when this virus is over if they can withstand this temporary kind of demand shock. So the bull case is previous disease outbreaks have peaked after 1 to 3 months, and there's no way of telling if coronavirus is gonna, you know, be done before the summer in 3 months. It's not looking that likely, but the point is they recovered to pre-outbreak levels previously, historically, as a good indicator, 6 to 7 months after. So if you're looking at these kind of strong kind of balance sheet positioned companies, there could be some good opportunities there for a bounce if you're a long-term investor. Again, oil prices down 7.5% today, $242 a barrel. This is going to have massive implications for the energy sector. So they're down big. Exxon is down about 30%. Year to date. And you can see the energy sector, XLE ETF, is coming to a really key level, a 10-year key level. But there's gonna be some opportunities, I think, for long-term investors. So names like ExxonMobil, they're trading at a very attractive 3x EBITDA with a 6.7% dividend yield. And this is a common phrase kind of in markets, is don't buy a company money just for its yield because it could be wiped out in one day like we've seen over the last few days. But there will be some opportunities for companies like Exxon that have been historically profitable if they can diversify their revenues and their business models into this cleaner energy, kind of hydrogen, renewables. If they can pivot to these kind of areas for the long term, I think they could be in a really good position and this could be a potential long-term play. For the near term, I think short term there's going to be some more pain for these energy names and it is approaching this key level here. But if you are a long-term investor, definitely names to look at. The factors to watch out for— so this is kind of winding down to the end of this video, but the virus is indirectly causing the drop in yields and the causing the volatility that we see. And it is the potential— and I think when, why markets are reacting the way they do is because there is potential for this to lead to a recession. Okay, it's not directly causing the stock markets to fall, but it's indirectly triggering the potential for a recession, for example, in the US, and a dramatic revision downwards to global growth. When you look at globally. Asia, obviously China the most severely affected, but I think there could be some more downside because I believe that— I think people are pricing in the, the kind of impact to the Chinese, you know, country and markets, but we haven't really seen it too prominent in Europe and the United States yet. So if you look at it from that perspective, if markets have reacted the way they have to just the outbreak in kind of China and Asia and kind of slowly spreading into Europe and US. What happens when, you know, there is this, you know, it hits the peak severity for Europe and the US? You know, how are people going to feel? I think the P in the price-to-earnings ratios have to come down dramatically. Last year we had, we saw huge multiple expansion. And I think if there is revisions down, to earnings, that kind of denominator in the price-to-earnings ratio, this is when we could see real carnage in markets, I believe. If we do see revisions down, I think heading into the year, people were kind of expecting earnings to remain resilient or, you know, slightly to the upside. If there are earnings revisions downwards, we're going to see, you know, equity markets definitely react to this. If, like we saw today, we saw $41 a barrel oil. If we do see $30 a barrel oil, this is going to lead to a lot of bankruptcies. The breakeven rate for US companies is around $40. So how long they can remain resilient in that kind of oil condition will remain to be seen. I think the availability of credit and liquidity, small to medium-sized enterprises in Europe, in the United States, if the banks can't lend to them or they kind of pull back their liquidity, there's going to need to be action like we've seen in Europe with the ECB announcing TLTROs. I think there could be similar measures taken by the Fed. They've only got 100 basis points now to play with from a monetary policy perspective. There's talks about fiscal stimulus packages, but again, that has to be has to be passed, obviously, by Congress. So the president takes it to Congress. And there's obviously doubts about, due to the partisan nature of the Republicans and Democrats, whether that would even pass. So I think the key now for kind of the Federal Reserve and central banks all over the world is that availability of credit. The financial system has to remain to provide liquidity, to basically provide a buffer for these companies to withstand these short-term temporary, hopefully, demand shocks to their revenues and their bottom lines. We will see continued volatility. But I think the key indicator for that is it is bearish. I think we saw some big updates. So yesterday, the equity industry futures were up around 5%. And you kind of think, oh, everything's great. Great again from a psychological perspective. But we tend to see these kind of big moves upwards after multiple down days in times of severe stress. So the financial crisis, the dot-com bubble, and even going back to the 1930s and the Great Depression, this is when we see these kind of wild bounces and wild swings in markets. I think this is not a financial, you know, financial services issue at moment. But just remember, or it's worth kind of remembering, that the mortgage-backed securities crisis, this was actually not, you know, due to the banks, right? It was the mortgage market that kind of caused this tight— severe tightening of financial conditions and illiquidity in the market. So definitely be watching financial institutions at the moment. Credit spreads are continuing to widen, and right now, just today, Yesterday we saw the US credit market gauge surge more than the least— the most since at least 2011. So these are the key factors to look out for. If you enjoyed this video, I know we touched on a lot of subjects. If you want to see more videos, please like, subscribe the channel, leave your comments if you enjoyed it or if you wanted me to elaborate on more points or make more videos on different topics. We have covered a lot, but definitely leave your comment below and we'll get some more videos out there. Thanks.