Spotting Trends: Sectors to Consider in a Changed World
• The COVID-19 pandemic has created a new trend line for our society, creating opportunities as behaviors change
• Long-term opportunities in software and clean energy exist, as well as near-term prospects for homebuilders as the economy aims to recover.
Apart from the human tragedy of COVID-19, the pandemic has created a new trend line for our society by disrupting every aspect of our daily routines, from how we make purchases and consume energy to how we stay connected. Some of these trends were in place before the pandemic. But now, they are likely to be amplified as we transition to a new world order.
Identifying true opportunities during a tectonic shift of this magnitude requires using specialized, industry-specific knowledge to capitalize on an evolving market regime.
We see three potential opportunities where we believe investors may benefit from targeted sector-based strategies – both for right now as the economy starts to recover and as the post-pandemic world continues to evolve and impact future generations.
Software: Solutions to support a new way of life Remote access, cloud storage, and internet-based solutions were strong secular trends before COVID-19. Today’s more digitally-connected world will require more software to function. And as we said in our mid-year outlook , we see software as the backbone of our new society. As a result, software and service firms may benefit from this seismic shift in corporate and consumer behavior across a variety of dimensions: video conferencing, e-learning, telehealth, project and document management, closed system social communication tools, cloud technologies, digital payments, and cyber security.
This generation-defining shift is one reason why earnings growth for software firms are expected to grow at 16% per annum over the next three to five years – compared to 10% for the broader market – and not see double-digit declines throughout the rest of 2020 and into 2021. In fact, as shown below, while the S&P 500 is projected to have negative sales growth over the remaining three quarters of this year, software and services firms are projected to continue to grow their top line each quarter. Valuations are a bit above their long-term average for the industry1, but with a lack of growth in our current environment the premium for a growth industry with the potential to reshape society is warranted.
To position portfolios for a more digitally connected but physically separated world, consider an allocation to software and software service firms with the SPDR S&P Software & Services ETF (XSW).
Clean Energy: Powering a rebuild The production of solar and wind energy was estimated to grow at significant pace this year,2 but as economies reopen, a spike in industrial activity and energy demand will likely accelerate the trend of seeking cheaper and more renewable sources of energy. In fact, as of June, the US is on track to produce more electricity this year from renewable power than from coal for the first time on record.3
If the past is any guide, the potential for future global fiscal stimulus with specific carveouts for green energy may further support the conversion to more renewable forms of energy consumption. After the 2008 financial crisis, South Korea put almost 80% of its stimulus spending toward climate-friendly policies and the International Monetary Fund dubbed the country’s recovery one of the swiftest and most successful in the world.4 Today, nations have already directed $40 billion to support green initiatives.5 With early polls indicating a change in leadership in the US6, greener forms of power generation may also be pushed to the forefront of any US legislative agenda – providing the economic growth that could spur new employment opportunities as the nation seeks to rebuild. Private funding has also accelerated during the pandemic; Amazon has committed $2 billion for a new Climate Pledge Fund and reported it is on track to source 100% renewable power by 2025.7
As the world turns to cleaner sources of energy, there may be no turning back. As shown below, as the great transition to greener forms of energy supply has occurred, firms focused on more sustainable forms of power generation have outperformed the broader market year-to-date (+10%), since the markets bottom on March 23rd (+14%), and over the past year (+26%) Plus, they have outperformed traditional energy firms by even much wider margins.
Source: Bloomberg Finance L.P. as of 06/22/2020. Past performance is not a guarantee of future results. Index returns do not include fees and assume the reinvestment of dividends.
To position portfolios for the great transition to greener energy sources, consider an allocation to firms focused on innovating and driving the adoption of sustainable renewables with the SPDR S&P Kensho Clean Power ETF (CNRG).
Homebuilders: Ready to build to meet demand As many states continue to ease their COVID-19 safety restrictions, both previously-and newly-interested homebuyers have emerged in droves, sending mortgage applications to their highest level in 11 years8. And while concerns for the greater economy ebb and flow, consumer sentiment has begun to rebound – rising 10% at the end of June off the March lows. Additionally, near-zero rates for the foreseeable future and an increase in the savings rate9 – which skyrocketed to 33%, up from 12.7% the previous month due to untouched stimulus checks and decreased recreational spending10 – are likely to make refinancing, purchasing, building, and remodeling homes more attractive as the economy begins to recover.
The congruent rise in mortgage applications may show that many are reconsidering their housing options after spending months indoors under stay-at-home orders. Notably, the sea change in corporate culture, where employees may no longer need to work in a physical office, also could be driving new interest in home buying outside of urban areas. As shown below, the rise in mortgage applications has coincided with a rise new home sales. And we already have seen starter home activity (homes under $200,000), increase back to 2018 levels.11
Source: Bloomberg Finance L.P. as of 06/22/2020. Past performance is not a guarantee of future results.
Of course, an increased housing demand brings the need to furnish or remodel. Therefore, investors also should consider consumer-related businesses involved in home improvement, as the deployment of the elevated savings in consumer pockets on home goods may get discretional spending back to normal levels.
To position portfolios for a housing market that may be at the forefront of a COVID-19 recovery, consider a diversified exposure to firms engaged in building new homes, providing construction materials, as well as those involved in home improvement and furnishing/appliance retail business lines with the SPDR S&P Homebuilders ETF (XHB).
To learn more about emerging sector investing opportunities, visit our dedicated sectors webpage.
1Current Price-to-book, Price-to-Earnings, Price-to-Next-Twelve-Month-Earnings, and Price-to-Book for the S&P Software & Services Select Industry Index were analyzed relative to their historical valuations from 2011, as of 06/22/2020 per FactSet based on SPDR Americas Research calculations
2Source: BloombergNEF, as of: 06/27/2019. CAGR of 8.54% (wind) and 6.88% (solar) by the year 2050
3Bloomberg Finance L.P., as of: 6/12/2020
4Source: “Green Stimulus Proposals for a post-Covid, Clean Energy Future”, Bloomberg Finance L.P. 06/09/2020
5“BNEF Theme: Green Stimulus: the Policies and Politics”, Bloomberg Finance L.P. 06/22/2020
6“Biden Takes Dominant Lead as Voters Reject Trump on Virus and Race”, New York Times, 06/24/2020
7“Amazon’s $2 Billion Climate Fund Doubles Microsoft Pledge: BNEF”, Bloomberg Finance L.P. 06/24/2020
8Weekly mortgage purchase applications, Mortgage Bankers Association as of 06/22/2020
9As measured by Personal Savings Rate, St. Louis Federal Reserve, as of 04/01/2020
10As measured by Personal Consumption Expenditures, S t. Louis Federal Reserve, as of 04/01/2020
SPDR ETFs è la piattaforma di exchange traded fund ("ETF") di State Street Global Advisors ed include fondi autorizzati dalle Autorità Europee come fondi aperti d'investimento UCITS. Gli SPDR ETFs potrebbero non essere disponibili o adatti a lei.
Gli ETF sono negoziati come le azioni, sono soggette al rischio d'investimento, il loro valore di mercato fluttua e potrebbero essere negoziati a prezzi superiori od inferiori al loro valore patrimoniale netto. Le commissioni di intermediazione ed i costi dell'ETF ridurranno i rendimenti.
Variazioni sui tassi di cambio possono avere un effetto negativo sul valore, prezzo o rendita dell'investimento. Inoltre non ci sono garanzie che un ETF raggiungerà i suoi obiettivi d'investimento
LE QUOTE DEI FONDI DELLA SICAV SPDR® ETF, SSGA SPDR ETFS EUROPE I PLC E SSGA SPDR ETFS EUROPE II PLC POTREBBERO NON ESSERE DISPONIBILI O NON ADATTE A VOI.. LE OPINIONI ESPRESSE IN QUESTO SITO NON COSTITUISCONO UN CONSIGLIO DI INVESTIMENTO. IN CASO DI DUBBIO, SI RACCOMANDA DI RIVOLGERSI AD UN CONSULENTE INDIPENDENTE. LE INFORMAZIONI E LE OPINIONI CONTENUTE NEL PRESENTE SITO NON COSTITUISCONO UNA SOLLECITAZIONE O UN'OFFERTA ALL'ACQUISTO O ALLA VENDITA DELLE QUOTE DEI FONDI O DI QUALSIVOGLIA ALTRO STRUMENTO FINANZIARIO.
Standard & Poor's®, S&P® e SPDR® sono marchi registrati di Standard & Poor's Financial Services LLC (S&P); Dow Jones è un marchio registrato di Dow Jones Trademark Holdings LLC (Dow Jones); questi marchi registrati sono stati concessi in licenza d'uso a S&P Dow Jones Indices LLC (SPDJI) e in sottolicenza per fini specifici a State Street Corporation. I prodotti finanziari di State Street Corporation non sono sponsorizzati, sostenuti, venduti o promossi da SPDJI, Dow Jones, S&P, dalle loro rispettive affiliate e licenzianti terzi e nessuna delle parti citate rilascia dichiarazioni in merito all'opportunità di investire in tale/i prodotto/i, né è responsabile in relazione agli stessi, fra l'altro, per errori, omissioni o interruzioni di qualsiasi indice.
Gli SPDR ETFs possono essere offerti e venduti esclusivamente nelle giurisdizioni in cui sono stati preventivamente autorizzati, in accordo con le normative vigenti.
Informazioni relative al Messico
Le presenti informazioni non costituiscono e non sono da intendersi come la commercializzazione o l’offerta di titoli e, di conseguenza, non dovrebbero essere interpretate come tali. I Fondi indicati nella presente non sono stati e non saranno registrati ai sensi della legge messicana sul mercato dei valori mobiliari (Ley del Mercado de Valores) e non potranno essere oggetto di offerta pubblica o essere venduti negli Stati Messicani Uniti. La documentazione divulgativa relativa a uno qualsiasi dei suddetti Fondi non può essere distribuita pubblicamente in Messico e le azioni dei Fondi non possono essere scambiate in questo paese.
Si consiglia di procurarsi e leggere i Prospetti e i KIID relativi agli SPDR ETFs prima dell'investimento. Ulteriori informazioni e i prospetti aggiornati/KIID che descrivono le caratteristiche, i costi e i rischi degli SPDR ETFs sono disponibili per i residenti dei Paesi in cui gli SPDR ETFs sono autorizzati alla vendita sul sito spdrs.com o presso l'ufficio di SSGA locale.