The global impact of COVID-19 remains a moving target. As can be seen in Exhibit 1, depending on the
success of social distancing, various scenarios could evolve in the coronavirus outbreak. In the recent
Epidemiology of the Markets perspectives, Ivy Investments framed the debate and the ongoing analysis
of the volatile investment landscape as a function of three main factors: 1) public health impact,
2) macroeconomic impact and 3) market impact.
Below we expand on our investment team’s insights regarding investment implications in the U.S. consumer
sector. Our research emphasis continues to scour the landscape of U.S. consumer product and services
businesses, with a view towards framing permanent versus transitory interruptions to earnings and cashflows.
Retail, transportation and hospitality employ more than 25% of the private sector workforce
A negative impact in the U.S. from the social distancing
initiatives is beginning to take hold. For the week ending
April 11, initial jobless claims jumped 5.3 million.
Cumulatively, total job losses related to the coronavirus
crisis currently stands at approximately 22 million. We
see the impact of the lockdown being more pronounced
in certain sectors including retail, transportation and
hospitality. For example, as illustrated in Exhibit 2, the
weekly retailers’ sales survey for the week ending April
9 dropped to 24.1 (a number above 50 indicates an
expansion of activity, while a reading below 50 signals
a contraction), the lowest level since 2008 as store
closures halted sales in many places.
14-Day Predictions – April 6-19, 2020 — April 6-19, 2020
Source(s): RBC Capital Markets research; CDC reports.
The retail, transportation and hospitality sectors combined
employ more than 25% of the U.S.’s total private workforce¹.
Currently, the disruption due to the COVID-19 pandemic is
fluid and uncertain, but forecasts by some associations help
in understanding the potential impact the outbreak could
have on the real economy.
Exhibit 2: Evercore ISI retailers' sales surveys
4-week average as of April 9 – 30.8
Source: Evercore ISI, as of April 9.
Forecast unemployment to soar to 15% in the second quarter
According to forecasts by the National Restaurant
Association, the industry may lose up to seven million jobs
if the restaurants are closed for three months². U.S. Travel
Association and Tourism Economics estimates by the end
of April there will be 5.9 million travel-related job losses
in the U.S.³
In the latest employment data, non-farm jobs declined by
701,000 in March. While the loss in jobs was broad-based,
the restaurant sector accounted for most of the drop. The
unemployment rate increased from 3.5% to 4.4%, the largest
one-month increase since 1975. Despite the recently passed
$2 trillion fiscal stimulus bill⁴, our base case forecast is
for unemployment to jump to 15% with upside risks in the
Growth forecasts revised significantly lower
With the above backdrop, we have significantly lowered our
global growth forecasts. In the U.S., on an annualized basis,
we are penciling in a quarter-over-quarter contraction of 35%
in the second quarter. For the year, our base case (around
60% probability) is for U.S. gross domestic product (GDP) to
record a negative print of 4%. Meanwhile, globally, we are
now forecasting GDP growth to fall by roughly 2%. Given the
uncertainty around COVID-19 and recent data, risks to our
forecast are tilted to the downside.
What does this mean for investors?
Overall, while tragic, we continue to believe COVID-19
may be a transitory event that will allow us to invest in
companies for the longer term at more attractive valuations.
Some industry participants are likely to experience
permanent damage from the abrupt economic shutdown.
Even if the unprecedented fiscal and monetary stimulus can
bridge the gap for companies, we think consumer behavior
is likely to take time to return to pre-virus norms, and any
recovery may unfold in stages. Will the highly levered
businesses have enough cash to weather the storm? Or, for
those that have thrived, can recent success be sustained
under more normal conditions?
As fundamental investors, our common framework across
strategies is to evaluate the long-term earnings power of
business models. Part of that is developing an understanding
of which businesses are strong enough to endure or even
emerge with bigger footholds, and which are likely to
succumb. In retail and hospitality, below are our main ideas:
In retail, mass merchants such as Walmart and Costco are
likely to have a favorable risk-reward profile in the initial
phase of the outbreak when most consumption was centered
around stockpiling. As we move on to the next phase of the
virus, in which the economy is hurt due to the increase in
unemployment and job losses⁵, we may see dollar stores such
as Dollar General and Dollar Tree perform better. Off-price
retailers such as TJX Companies and Ross Stores may have
some tailwinds from the pandemic supporting them, as we
think the crisis will likely leave a glut of apparel supply on
which these off-price retailers can capitalize.
Cyclical companies such as Home Depot and Lowe’s may
be interesting once we weather the economic slowdown.
We believe housing is one of the sectors that tends to
bounce first as the economy recovers due to its interest-rate
Meanwhile, e-commerce companies, such as Amazon are
likely to benefit as well, as more people avoid stores where
people congregate, instead choosing to go online for their
needs. We view this pandemic as a catalyst for further
e-commerce adoption, especially for online grocery, where
consumers will likely stick with their new-found convenience
even when the crisis is over.
In consumer staples, many companies are benefitting
from COVID-19-driven pantry loading, proving the sector
to be a hiding place in times of market uncertainty. Centerof-
store companies such as Campbell Soup and General
Mills that have exposure to some of the historically outof-
favor categories, such as canned soup and ready-to-eat
cereals, are witnessing strong sales momentum with sales
up more than 30 % in March. Beyond pantry loading, if a
prolonged economic slowdown hits, we think most packaged
food companies will continue to benefit as at-home food
consumption is likely to pick up during recessions. Overall,
we have seen the center-of-store packaged food stocks hold-up
up better compared to the rest of the consumer staples
pack. As fundamental investors, our job is to understand if
these trends can persist and become permanent, or if they
represent artificial and short-term earnings growth.
In household and personal care, we have seen companies
such as Clorox and Reckitt Benckiser as potential
beneficiaries from the coronavirus outbreak cycle as
demand for the products (disinfecting and cleaning wipes)
has remained strong and is likely to remain high through
different stages of COVID-19.
In textile and apparel, athletic and performance brands
are likely to be defensive investments as compared to
luxury and fashion-oriented brands. As the world becomes
more casual, there have been secular tailwinds supporting
demand for products from companies such as Nike, Adidas,
and Columbia. Moreover, athletic and performance brands
benefit from geographical diversification. There is a new
demand for athletic products from emerging markets as the
middle class grows and people, because of lifestyle changes,
purchase more athletic wear. Additionally, these companies
have stronger and more successful e-commerce businesses
because of their business model and broader ecosystems
(such as Nike Training Club app, Adidas Runtastic), which
is helpful in the current environment in which more people
are shopping online. In our view, many of these athleisure
business models were attractive pre-crisis and are poised to
emerge even stronger on the other side.
In restaurants, quick-service restaurants with a strong
drive-thru, take-out, delivery sales channels, and valueoriented
meal offerings have outperformed other restaurants.
Companies such as Domino’s have benefitted because of
their strong captive delivery system and the perception
of good value in pizza as consumers look to save money.
Casual dining (full-service restaurants) is a category more
challenged by COVID-19 due to state-mandated closures
of dining rooms, which typically account for 80% or more
of sales. Companies like Darden Restaurants (owner of
concepts such as Olive Garden, LongHorn Steakhouse
and The Capital Grille) that have healthy balance sheets
stand to gain market share as the financial pressures
from temporary store shutdowns and weakened consumer
demand force many competitors to close.
The above insights into the Ivy Investment team’s
perspective on the U.S. consumer landscape frame some
of the analysis underlying a broad range of strategies,
including in the areas of large-cap, mid- and small-cap
and fixed income.
Market dislocation provides opportunities
We believe the COVID-19 outbreak is likely to be a
transitory event. While unfortunate, we believe such passing
events lead to risk-off market environments, providing us
opportunities to seek to take advantage of near-term stock
price dislocations to invest in long-term advantaged business
models. Looking ahead as fundamental investors, we
continue to look for opportunities by laying greater emphasis
on the fundamentals and quality of asset classes and sectors.
1. https://fred.stlouisfed.org/release/tables?rid=50&eid=4881&od=. Total of 33.7 million people
5. For the week ending March 21, initial jobless claims jumped to 3.28M, a record high number.
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Risk factors: Investing involves risk and the potential to lose principal. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country,
and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the value of such securities may
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The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets
in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises
caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined