Are you sure you want to change languages?
The page you are visiting uses a different locale than your saved profile. Do you want to change your locale?
You are leaving SSGA.com
The website you are accessing is created and maintained by another entity. We make no representation or warranty with respect to the information contained on the site or that it is appropriate in all jurisdictions or countries, or for use by all investors or counterparties. The products and services discussed at this site may not be appropriate for sale or use by all investors or counterparties. By providing this link, we are not providing you with investment advice or offering securities for sale to you. All persons and entities that access this site do so on their own initiative and are responsible for compliance with applicable local laws and regulations.
You are leaving SSGA.com
The website you are accessing is created and maintained by another entity. We make no representation or warranty with respect to the information contained on the site or that it is appropriate in all jurisdictions or countries, or for use by all investors or counterparties. The products and services discussed at this site may not be appropriate for sale or use by all investors or counterparties. By providing this link, we are not providing you with investment advice or offering securities for sale to you. All persons and entities that access this site do so on their own initiative and are responsible for compliance with applicable local laws and regulations.
You are leaving SSGA.com
The website you are accessing is created and maintained by another entity. We make no representation or warranty with respect to the information contained on the site or that it is appropriate in all jurisdictions or countries, or for use by all investors or counterparties. The products and services discussed at this site may not be appropriate for sale or use by all investors or counterparties. By providing this link, we are not providing you with investment advice or offering securities for sale to you. All persons and entities that access this site do so on their own initiative and are responsible for compliance with applicable local laws and regulations.
Insights
Using Sectors for the Path to Recovery
- There are sectors to suit every market environment and part of the economic cycle, as reflected in recent performance and investor activity.
- In the past three months, the path to recovery scenario has become bumpier as uncertainties mount.
- While value sectors have recently rallied, we still believe the more defensive sectors are best positioned amid COVID-19 difficulties.
Recent investor activity and sector performance
Many investors have used sector ETFs for positioning during the COVID-19 crisis. As investment vehicles, sector investments via ETFs provide diversification and help to mitigate the risk associated with investing in just one company. Sectors also provide the ability to target more defensive parts of the economy that could benefit most from recovery or that have been overly marked down given long-term prospects.
Many investors have recognised the potential benefits of sector selection and may have profited from the much higher dispersion of sector returns over recent months, as seen in the chart below. During this period, flows into sector ETFs reached near-record levels. The highest inflows have consistently been into Technology and Health Care, which have shown strong earnings sentiment. Financials has been unpopular as various QE measures are likely to hit margins for an extended period of time and there has been heavy two-way trading in Energy.
Return dispersion has dampened but there is still a significant difference between sector returns year to date: MSCI World Information Technology NTR has returned 5% while Energy is down 34%.
Rolling 3-Month return dispersion between S&P 500 sectors
Source: State Street Global Advisors, Bloomberg Finance, L.P., as of April 30, 2020. Past performance is not an indication of future returns.
Which path and which sector?
As noted in our Q2 SPDR Sector Compass, we see three possible paths to economic recovery, dependent on control of the virus spread, public action and subsequent reopening of economies. Initially, most investors expected a relatively quick containment of the virus, followed by a V-shaped economic recovery. It was assumed the public health response would be successful within months, and new measures, such as antibody testing, would allow a quick return to physical work and consumers resuming their usual behavior.
In this ’Quick Recovery’ scenario, as illustrated below, we prioritised relative earnings stability. Top of our Sector Picks for Q2 was Health Care for its sheer defensiveness, followed by Technology and Communication Services, which we believed would see a relatively lower fall in demand for their products and services.
3 scenarios for the economic impact of COVID-19 crisis
The above diagram is for illustrative purposes only.
While infection rates and death rates have hopefully peaked and economies are reopening, the trajectory for activity levels is more uncertain than assumed two months ago. Worryingly, no one can rule out a reoccurrence of virus spread and consequential re-imposition of physical distancing measures. Economic damage looks greater than initially feared and earnings forecasts have still not reflected these top-down predictions. This ’Delayed Recovery’ scenario suffers bumps in the path to economic recovery.
All three Sector Picks still present opportunity in this more negative scenario. These sectors play to business and social themes that could become norms post-COVID 19, such as a greater propensity for working at home, more online shopping from social media platforms, and a ramp-up in health testing and vaccine research. The opportunities in inherent in these growth segments should help offset earnings weakness in other parts of tech, communication services and health care businesses.
Whereas more cyclically sensitive sectors, such as Industrials and Consumer Discretionary, would be attractive if recovery were closer to a V-shape, they are now less appealing. Meanwhile, traditionally defensive sectors could provide relative downside protection, for example Consumer Staples, with its broad product range of food, beverages, tobacco and household goods, and Utilities. The latter should shine during a recessionary period, offering relatively low volatility and low correlation to other equities; however, so far it has been largely ignored.
Given the response to public health measures and policy stimulus, it is extremely unlikely now that we face the worst case scenario, which we named ‘Persistent Issues’. Were there a threat of escalation of the pandemic and a long recessionary period, we would assume more investor demand for Utilities (given its low correlation with the rest of the market) and Health Care (higher demand for its products and services).
What about a sector rotation?
All sectors rose globally in May on excitement of economies reopening and renewed risk-on appetite. The equity rally broadened out with a rotation towards value at the expense of growth stocks, with cyclicals outperforming defensives, and high short-interest stocks outperforming crowded and low-short-interest stocks. This is not a surprise given the performance gap that had opened up, but it could be short-lived as it did not come with any better economic news.
We can see from relative flow directions and sentiment indicators that investors remain cautious. The risks are still there and we could see many economic and corporate disappointments on the path to recovery. It could pay to be more defensive or in sectors that are still suffering least from COVID-19 related disruption. We reiterate the SPDR Sector Picks.
Marketing Communication. For professional investor use only.
Important Information
Abu Dhabi: State Street Global Advisors Limited, Middle East Branch, 42801, 28, Al Khatem Tower, Abu Dhabi Global Market Square, Al Maryah Island, Abu Dhabi, United Arab Emirates. Regulated by ADGM Financial Services Regulatory Authority. Telephone: +971 2 245 9000.
Belgium: State Street Global Advisors Belgium, Chaussée de La Hulpe 120, 1000 Brussels, Belgium. Telephone: 32 2 663 2036, Facsimile: 32 2 672 2077. SSGA Belgium is a branch office of State Street Global Advisors Ireland Limited. State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Dubai: State Street Global Advisors Limited, DIFC Branch, Central Park Towers, Suite 15-38 (15th floor), P.O Box 26838, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. Regulated by the Dubai Financial Services Authority (DFSA). Telephone: +971 (0)4-4372800, Facsimile: +971 (0)4-4372818.
France: State Street Global Advisors Ireland Limited, Paris branch is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Ireland Limited, Paris Branch, is registered in France with company number RCS Nanterre 832 734 602 and whose office is at Immeuble Défense Plaza, 23-25 rue Delarivière-Lefoullon, 92064 Paris La Défense Cedex, France. T: (+33) 1 44 45 40 00. F: (+33) 1 44 45 41 92.
Germany: State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. Authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”). Registered with the Register of Commerce Munich HRB 121381. T: +49 (0)89-55878-400. F: +49 (0)89-55878-440.
Israel: No action has been taken or will be taken in Israel that would permit a public offering of the Securities or distribution of this sales brochure to the public in Israel. This sales brochure has not been approved by the Israel Securities Authority (the ‘ISA’). Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution. This sales brochure may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent. Nothing in this sales brochure should be considered investment advice or investment marketing as defined in the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (“the Investment Advice Law”). Investors are encouraged to seek competent investment advice from a locally licensed investment advisor prior to making any investment. State Street is not licensed under the Investment Advice Law, nor does it carry the insurance as required of a licensee thereunder. This sales brochure does not constitute an offer to sell or solicitation of an offer to buy any securities other than the Securities offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person or persons in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person or persons to whom it is unlawful to make such offer or solicitation. Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent. The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered Number: 145221. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300.
Italy: State Street Global Advisors Ireland Limited, Milan Branch (Sede Secondaria di Milano) is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Ireland Limited, Milan Branch (Sede Secondaria di Milano), is registered in Italy with company number 10495250960 - R.E.A. 2535585 and VAT number 10495250960 and whose office is at Via Ferrante Aporti, 10 - 20125 Milano, Italy. Telephone: +39 02 32066 100. Facsimile: +39 02 32066 155.
Netherlands: State Street Global Advisors Netherlands, Apollo Building, 7th floor Herikerbergweg 29 1101 CN Amsterdam, Netherlands. Telephone: 31 20 7181701. SSGA Netherlands is a branch office of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Switzerland: State Street Global Advisors AG, Beethovenstr. 19, CH-8027 Zurich. Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-105.078.458. T: +41 (0)44 245 70 00. F: +41 (0)44 245 70 16.
United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350.
Standard & Poor’s, S&P and SPDR are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Issuing Office: This document has been issued by State Street Global Advisors Ireland (“SSGA”), regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registerednumber 145221. T: +353 (0)1 776 3000. Fax: +353 (0)1 776 3300. Web: ssga.com.
ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. The investment return and principal value of an investment will fluctuate in value, so that when shares are sold or redeemed, they may be worth more or less than when they were purchased. Although shares may be bought or sold on an exchange through any brokerage account, shares are not individually redeemable from the fund. Investors may acquire shares and tender them for redemption through the fund in large aggregations known as “creation units.” Please see the fund’s prospectus for more details.
Past Performance is not a guarantee of future results.
SPDR ETFs is the exchange traded funds (“ETF”) platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU). This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
© 2020 State Street Corporation. All Rights Reserved.
3102271.2.1.EMEA.INST
Exp. Date: 30/06/2021