Chaos has ruled markets for months. With a pandemic pummeling the economy, and everyone from central banks to mom and pop investors trying to push asset prices back up, it’s a setting guaranteed to strain the insights of fund managers.
Consider a quantity called dispersion, or how varied individual stock returns are. Bashed around in earnings season, differences between winners and losers in the S&P 500 are right now almost twice the average of the last decade.
That creates openings for active managers who can hunt beyond indexes for companies positioned to bounce, according to Katie Koch, co-head of fundamental equity at Goldman Sachs Asset Management. Funds advised by Koch, whose firm has about $1.8 trillion under supervision, are beating their benchmarks at an 80% rate in 2020.
“You want to take advantage of this dispersion and possibly find these names that haven’t been as resilient as the rest of the market, therefore providing higher upside,” she said by phone this week. “You need to look beyond the mega-cap, very resilient tech names to find those recovery opportunities.”
That big gaps would open in valuations is one thing people got right when trying to forecast the current earnings season, which has come without the aid of reliable estimates. Indeed, many professional traders were excited by the prospect of a market thrown into chaos by the pandemic’s economic consequences, believing it would be an opportunity to exploit their real-time edge.
Equity markets have shown tremendous resilience in the face of tough economic data thanks, in part, to intervention by the Federal Reserve. The central bank’s balance sheet has ballooned in recent weeks, passing $6 trillion, with some economists projecting it could top 50% of U.S. GDP by the end of the year. Thus, one time-honored rule rings loudest at Goldman.
The holdings in these top-performers “are companies that will be replaced, from a performance standpoint, over the next decade,” an expert says.
“Don’t fight the Fed,” Koch said. “The sheer volume of monetary support and also what they’re buying has really removed a lot of the left-tail risk for equity markets and that’s being reflected in the current relatively resilient levels of the S&P 500.”
Her recommendation to clients? Stay invested but be aggressively active in the pursuit of “abundant” opportunities that exist at the company level.
Companies should, most importantly, have balance sheet strength to manage through a protracted shutdown. From a valuation perspective, Koch looks for firms that have been heavily discounted relative to their value. Lastly, she looks for businesses that might be attached to secular growth opportunities her team believes will eventually recover.
Here are some of the areas Koch and her team are exploring:
BACK TO WORK
While greater work-from-home adoption might become a post-crisis legacy, large swaths of employees will likely be returning to the office. That should benefit areas such as childcare, catering, industrial cleaning and small-business solutions, including companies that provide payment solutions for smaller businesses.
Koch also says a number of company executives she’s been in touch with have voiced a desire to localize some of the most vulnerable parts of their supply chains. Should that happen, advanced manufacturing companies and 3-D printing firms might be well positioned to reap the benefits because they can help control for labor costs, she said.
HAVING FUN, AGAIN
One of the most visible and alarming emblems of the current crisis has been the escalation in jobless claims and the accompanying plunge in consumer confidence. Fears the consumer might be slow to bounce back are everywhere, with Jerome Powell, the chairman of the Fed, saying this week that the downturn’s depth and duration remain extremely uncertain, with the burden falling most heavily on those least able to carry them.
Koch and her team expect a gradual recovery but find comfort in historical precedent. Crises, including the current one, tend to make people eventually want to go out and live life to the fullest. “We do expect a gradual resurgence of the millennial consumer preference for experience over things,” she said.
Highly select travel names and second-derivative plays in the travel space — such as tech companies that enable travel planning as well as restaurants — could be beneficiaries.
DATA DOMINATION
As businesses shuttered in March, millions migrated to working from home — and many may continue to do so even once the coronavirus outbreak has been conquered.
One of the legacies of this crisis is going to be demand for getting data and getting it faster, said Koch. A greater number of people might live their lives online than they did before the outbreak — and it’s a trend that could resonate across multiple generations.
This may expedite 5G capex spend in the U.S. and potentially around the world. While many data-related names have been resilient, there is a dislocation between price and value in select semiconductor companies that are focused on 5G solutions, she said. — Additional reporting by Sarah Ponczek
