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Ten weeks on from the market lows in March, we have seen the equity rally broaden out with a rotation towards value at the expense of growth stocks. Cyclicals have outperformed defensives and high short-interest stocks have outpaced crowded and low short-interest stocks.
These moves have been driven by excitement for economies reopening and renewed risk-on appetite. However, this relative change could be short lived as it has not come with a change in the macro narrative – growth is still scarce, and quality is still necessary in a fragile market. Both higher bond yields and improved PMIs could be needed for the cyclical rotation to be sustained.
Despite the recent rotation, investors remain cautious (as illustrated by flows and sentiment indicators). At State Street Global Advisors, we remain wary about the length of economic recovery and high earnings multiples. There could be many corporate disappointments on the path to recovery. The risks are still out there.
For these reasons, we still believe in taking a relatively defensive approach and focusing on sectors that could weather the turbulence of public health measures and economic change. Our recently published article, 5 Sectors to Watch during COVID-19, provided an update on our Q2 SPDR Sector Picks: Health Care, Technology and Communication Services, and also offered commentary on two other defensive sectors, Utilities and Consumer Staples.
The market has moved beyond its total focus on COVID-19, where liquidity and corporate survival were essential elements, and is now considering political risk and longer-term themes. We believe that Health Care and Technology are particularly well positioned for long-term trends, regardless of the path to economic recovery.
Health Care and Technology ETFs have continuously dominated sector ETF inflows during the last three months. Both sectors have offered quality characteristics and, importantly, strong cash flow and dividends in an environment starved of income. Post the Q1 results season, earnings forecasts were reduced, although not as severely as across other sectors, and the growth rates remain well above average this year (see Figure 1). Looking ahead, businesses within these sectors, particularly biotechnology and software, provide key exposure to future trends.
Earnings per share growth in 2020 (%)
Source: FactSet, as of 1 June 2020. The above targets are estimates based on certain assumptions and analysis. There is no guarantee that the estimates will be achieved.
Much is being written about societal change and the ‘new normal’ post the COVID-19 crisis. Technological innovation will be at the forefront of how we consume information, adjust to new working conditions, and carry out everyday tasks. For example, digital payments will probably become standard for retailers, while video games, streaming networks, virtual reality and social media will become less of a luxury spend and considered more of a staple by many people in the future.
Remote access, cloud storage, and internet-based solutions were strong secular trends before COVID-19. During this pandemic, however, the use of these services has significantly increased. The ramp up in demand for application, infrastructure and cybersecurity software to support and protect IT platforms is unlikely to fade quickly. Investors can access these trends by buying the whole Technology sector.
In the wake of the pandemic, we are likely to see demand for advanced medicine, improved structural health care processes, and remote access capabilities to support fewer contact interactions. Furthermore, the ageing population, need for cancer treatments and genetic therapies, and new technologies to improve the efficiency of health care systems may act as additional tailwinds.
Biotech is a one bright spot within the Health Care sector, given it is driving the search for a COVID-19 treatment. The pharmaceutical majors have large vaccine businesses and testing capabilities that have also been expanded. It is hard to predict which firm might produce the first effective COVID-19 therapy, thus buying a basket of global health care companies via a sector ETF represents a pragmatic approach.
SPDR offers a range of ETFs through which investors can play the themes described above. To learn more about these funds, and to view full performance histories, please follow the links below:
SPDR S&P U.S. Health Care Select Sector UCITS ETF
SPDR MSCI Europe Heath Care UCITS ETF
SPDR MSCI World Heath Care UCITS ETF
SPDR S&P U.S. Technology Select Sector UCITS ETF
SPDR MSCI Europe Technology UCITS ETF
SPDR MSCI World Technology UCITS ETF
European-Domiciled ETP Segment Flows (Top/Bottom 5, $mn)
European-Domiciled ETP Asset Category Flows ($mn)
Sources: Bloomberg Finance L.P., for the period 28 May – 5 June 2020. Flows are as of date indicated and should not be relied upon as current thereafter.
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2015149.127.1.EMEA.INST
Exp. Date: 30/06/2021