IVY INSIGHTS – EARNINGS SEASON OVERVIEW
Commentary as of April 27, 2020
Dan Hanson: We are in the midst of earnings season with Amazon, Alphabet and Microsoft among the companies reporting this week. These companies all feature a mix of enterprise, cloud and consumer-facing business models. While we expect the biggest uncertainties to be on the consumer-business side, we look forward to their insights for the second half of the year.
Within the financial markets, we have seen a bifurcation of winners and losers that we believe is a great set-up for active managers. Supported by fiscal and monetary stimulus, financial markets rebounded from the March 23 trough. Broadly, fixed-income markets have rallied with a flight to safety. For example, the 10-year U.S. Treasury is up 13% year-to-date. There are many winners and losers: small caps and value stocks have underperformed, while large cap – and large cap-growth stocks in particular – have outperformed, reflecting the strong fundamentals of mega-cap companies.
Furthermore, U.S. markets supported by the Big Tech companies have generally recovered more quickly versus the global markets. We believe this is based on two key factors: 1) the nature of the businesses where large asset-light internet companies are mostly domiciled in the U.S., and 2) the magnitude of fiscal and monetary measures have been more forceful than in many other global markets.
Today’s financial markets have seen one of the worst drawdowns compared to the past recessions over the past century. In this type of environment, we seek to be balanced in our portfolio exposure, especially since we anticipate high volatility is likely to continue.
How do these re-opening plans and the possibility of additional global policy factor into our economic view?
Derek Hamilton: As we have previously discussed, the focus is still on the world re-opening and relaxing lockdown measures. We believe countries around the world are moving in the right direction. In the U.S., several states opened in the last few days, with varying degrees. New York Governor Andrew Cuomo mentioned the state may be able to start reopening after May 15, with New York City (NYC) following sometime afterwards.
In terms of economic activity, while not at pre-virus levels, activity is bottoming. We have access to data points from companies such as Alphabet that share Google maps data about how much people are going out. The company breaks the data down by type of activity – such as visits to grocery stores, and the data has shown the pace of decline has flattened.
Furthermore, we believe the COVID-19 testing regime, including antibody tests, will be important to determine where we go in the future. More recently, antibody tests have suggested that COVID-19 infection rates could be much higher than initially recorded.
In New York State, it is suggested that 14% of residents could have had the virus at some point, and over 20% of NYC residents. These are very small sample sizes, but if those numbers are accurate, it means the mortality rate could be as low as 0.5%. A much lower mortality rate has significant ramifications for when we think about a potential second outbreak and shutdown, which would need to be much less severe because of the low mortality rate.
Furthermore, Sweden has adopted a different approach to navigating the coronavirus crisis and could eventually offer a more accurate mortality rate. It implemented very limited restrictions in an attempt to reach herd immunity at a rapid pace. Swedish health experts believe that herd immunity in the capital city of Stockholm could be reached in the next few weeks.
Regarding global policy, we are likely to see continuous fiscal and monetary stimulus from global central banks and governments. U.S. Congress passed another stimulus bill last week for lending to small businesses and the healthcare system. Also, Congress will reconvene on May 4 and we expect discussions around another package for supporting small businesses, as well as help for state and local governments.
On the monetary policy front, central banks globally continue to ease aggressively. We expect central banks to continue to take appropriate action in order to ensure financial stability and try to stimulate economic activity. Specifically, the U.S. Federal Reserve (Fed) has reacted in a faster and more aggressive manner than during the global financial crisis. The Fed could ease more if needed, but will likely continue to amend current policies and introduce new programs to ensure the financial system is operating properly.
We could see additional easing from the European Central Bank (ECB). The European Union has been discussing additional fiscal spending plans and how that burden should be shared amongst the fiscally weak economies, such as Italy and Spain. Until a conclusion is reached on these discussions, we believe the ECB will do everything within its means to keep the government bond spreads from blowing out. We might also see some upsizing in the Pandemic Emergency Purchase Plan – a plan implemented to support countries during the COVID-19 crisis by buying government bonds.
How does this translate to the financial markets?
Dan: We believe businesses whose customers are hampered by economic conditions will likely suffer. Businesses that don’t have a strong value proposition are being challenged. We are seeing growth outperform and cyclical companies underperform. We believe that this diversification and bifurcation between winners and losers speak to the investment opportunity of active management in high-quality franchise businesses.
Past performance is no guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through April 27, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
Risk factors: Investing involves risk and the potential to lose principal. Fixed-income securities are subject to interest rate risk and, as such, the value of such securities may fall as interest rates rise. 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.
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 with certainty.