Markets

The Impact of COVID-19 on Investment Markets and Industry Sectors

The investment industry data aggregator, S&P Global, recently published a comprehensive summary of its data collection and analysis on how the COVID-19 pandemic has affected different facets of the investment markets through the first three quarters of 2020. The summary also provides a picture of what investors can expect as the year winds down and pandemic-influenced trends either continue or evolve into 2021 and beyond.

Individual high-net worth investors, institutions, and foundations would do well to focus on a few key areas of the summary.

Credit Conditions

The pandemic’s impact on credit markets is expected to continue through 2023. Different regions will experience different paces and shapes of recoveries. For example, in the Asian-Pacific region, China and other developed economies are likely to experience faster rebounds with emerging economies lagging far behind. Credit risks will remain on the downside as governments have run out of tools and appetites to inject further stimulus into pandemic-stagnant markets. The corporate borrowers that were able to do so have taken on large amounts of debt. Other less creditworthy borrowers have been locked out of the markets and will continue to struggle at least until the pandemic winds down.

Auto and Transportation

With fewer people commuting to work, the auto industry will experience sales declines. Many auto manufacturers entered the pandemic in an already-weakened position and were already adjusting to lower demand. That may have helped them to generate better cash flow that will pull them through the downturn in sales. Supply chain disruptions continue to pose significant problems. Demand for heavy-duty trucks will also be depressed through the end of 2020 and into the first part of 2021.

Aviation

The airline industry has perhaps suffered more than many other industry sectors. Global air traffic in 2020 has dropped by almost 70% as countries shut down their borders and travelers avoided extended contact in airplanes.

Lodging and Hospitality

Revenues in the global gaming industry will drop by 50% or more through the end of 2020 but will rebound in 2021 and beyond as pent-up demand and a loosening of COVID-induced travel restrictions brings clients back into hotels and gaming centers. The gaming industry in the United States is already showing signs of a rebound. Industry participants are expanding their presence in online gaming and are finding ways to monetize other assets. Hotels are not experiencing the same level of rebound, however, as defaults on debt are beginning to increase. Analysts do not expect a full recovery until late 2023, at the earliest.

Consumer Goods

Consumer goods manufacturers suffered a significant initial shock as the pandemic shut down warehouses, distributors, and retail outlets. The sector shows signs of an early rebound, however, as homebound consumers are increasing demand for consumer goods. Bigger, more-established brands are likely to experience growth in all but premium brands. Packaged goods and home care products will see the highest increases in demand. Supply chain gaps are being quickly filled with a more diverse group of suppliers that are pioneering a risk-based and sustainable approach to sourcing.

Market Liquidity

Access to dollar liquidity in the Asian markets is slowly returning, although dollar funding is expected to remain uneven through the end of 2020. Some analysts and market watchers have concluded that a swift, massive, global response by central banks was necessary to contain a worldwide liquidity crisis. Central bank intervention did ease certain pressures, but as markets continued to function, investment banks and other financial service providers stepped up to support market liquidity with different investment programs and vehicles. Markets that did not restrict those programs reported strong overall liquidity and robust buying and selling of debt and equity instruments.

Environmental, Social, and Governance

Sovereign funds and sovereign-tied investments absorbed significant ESG-related downturns reflecting investor concerns over governance factors. On the positive side, the pandemic has fostered a class of social bonds as one of the faster-growing segments in the global fixed income market. Social bond disclosure issues continue to have an outsized negative influence on ESG investments, with few improvements seen on the horizon. Analysts are now closely observing how private companies will react to COVID pressures in their adoption of ESG-influenced board and corporate resolutions.

Financial Institutions

Banks and other finance entities in the emerging markets have a more negative outlook than similar institutions in Europe, the United States, and other developed regions. Banks everywhere will feel a greater impact on their profitability rather than on their overall asset holdings. Some consolidation in the banking industry is likely as more stable banks absorb smaller or weaker institutions. Private financial and investment services firms will continue to grow and add services as investors look for alternatives and specialized services that commercial and investment banks do not or cannot offer to investors that do not meet high minimum capitalization requirements.

Healthcare and Pharmaceuticals

The healthcare and pharmaceutical sectors came into the pandemic with strong cash reserves and with a global perception that they are essential businesses that governments will continue to support and sustain. The sectors were among the first to show rapid recovery at the end of the second quarter and beginning of the third, but that recovery has largely leveled off, particularly in areas such as elective surgeries. Public health care specialists are eagerly anticipating the development of a COVID vaccine, but industry observers are expressing caution as the demand for that vaccine and the prospects of distributing it have the potential to cause serious market disruptions.

Leveraged Finance

In the European markets, deteriorating credit quality and the risks of lower recovery prospects due to higher leverage and collateral leakage has increased the overall pressure on collateralized loan obligations. The impact of the COVID economic shock in the United States, however, has been less severe than expected. Certain industry sectors, including startups and healthcare, are experiencing a greater overall leveraged finance shock.

These highlights from the S&P Global summary reflect only a very small number of issues that sovereign government, investment and commercial banks, corporate entities, and investors are facing as the COVID-19 pandemic continues with no apparent end in sight. To the extent that the pandemic response is a marathon and not a sprint, investors would do well to realign their wealth management plans and portfolios to more directly account for the impact of the pandemic, including altering risk profiles and planning for better liquidity in the event of a long-term market decline.