Are Global Equity Markets Riding on Select Stocks' Coat-tails?
Published on 14 Oct, 2020
Global equity markets have defied the overall negative economic trends over the past six months and have continued to rise. However, a closer look reveals that this recovery is mainly due to an increase in stocks of select companies in just few sectors, led by IT, and not broad based. Several industries are badly hit, and their stocks would continue to exert downward pressure on indices till the onset of economic recovery. As economies recover unevenly from the COVID-19 crisis, the ongoing US House antitrust hearing on tech stocks and any possible action against tech companies may create short-term pressure on these stocks, and consequently, broader indices.
The past six months have witnessed a rebound of equity markets across the world, post a steep sell-off caused by the COVID-19 pandemic in March 2020. Several major equity indicators have either turned positive on a year-to-date (YTD) basis or are edging closer, recovering from their respective troughs on March 18, 2020. For instance, the S&P 500 index has wiped out all losses resulting from the sell-off triggered by the pandemic and reached an all-time high on September 9, 2020. Stock markets across the globe are defying negative trends, including the current economic crisis, elevated unemployment levels, and precarious economic recovery, and continue to rise. The primary reason for such resilience can be the ubiquitous massive fiscal and monetary stimulus and the significantly low interest rates.
Even though indices have returned to their pre-COVID levels, the performance is driven by dramatic gains in stocks of only select sectors. For instance, the S&P 500 index has been propelled by sectors such as information technology (IT) and consumer discretionary. The surge in stocks of these sectors considerably impacted the overall market performance and propelled the index to new record highs. Consequently, any correction in stocks of such companies might drag the overall index down significantly, as other sectors have shown persistent weakness during this period.
Figure 1: Equity markets sector wise performance (YTD 2020)
Indices/Sectors Performance |
Development Markets |
Emerging Markets |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
MSCI World |
S&P 500 |
STOXX 600 |
FTSE 350 |
TOPIX |
KOSPI 200 |
MSCI EM |
SSE Composite |
SENSEX |
HANG SENG |
Refinitiv GCC |
|
3.8% |
7.6% |
-10.9% |
-19.7% |
-4.3% |
8.1% |
0.7% |
7.3% |
-1.8% |
-14.4% |
-4.1% |
|
Health Care | 7.4% | 6.3% | -0.6% | -22.5% | -1.3% | 43.6% | 33.6% | 48.4% | 51.2% | 31.2% | 33.2% |
Information Technology | 30.9% | 31.2% | 11% | -7.6% | 5.8% | 15.6% | 23.5% | 24% | 42.2% | 59.1% | 15.1% |
Consumer Staples | 1.8% | 4.5% | -11.4% | -21% | -6.6% | -2.6% | -4.2% | 54.6% | -2.8% | 11.8% | 6.5% |
Consumer Discretionary | 22.5% | 27.8% | -13.6% | -50.8% | -21.9% | 3.3% | 31.6% | 29.9% | -0.7% | 10.1% | 50.2% |
Financials | -19.5% | -18% | -7% | -13.4% | -22.7% | -21.2% | -26.3% | -7.4% | -22.1% | -20.6% | -10.5% |
Industrials | -0.7% | -0.8% | -4.7% | -7.8% | -8% | -11.1% | -11.8% | 11.9% | -10.7% | 2.6% | -0.1% |
Utilities | -0.8% | -1.8% | 1% | -6.7% | -13.6% | -22.9% | -23.2% | -2.8% | -20% | -20.6% | -2.2% |
Materials | 5.4% | 8.3% | -10.1% | -3.2% | -47.2% | -13.2% | -1.2% | 3.8% | 1.9% | -3.1% | 2.1% |
Energy | -46% | -48.8% | -39.4% | -54.5% | -23.3% | 27.6% | -27.5% | -16.3% | 23.3% | -36.1% | -8.1% |
Real Estate | -11% | -4.7% | -18.6% | -24.1% | -21.6% | -18.3% | -23.1% | -6.6% | -25.5% | -21.6% | -5.8% |
Communication Services | 7.7% | 9.3% | -18.5% | -23.9% | 13.8% | 44.5% | 16.9% | 1.9% | -6.2% | -21.8% | 0.9% |
Source: Refinitiv; YTD – as of October 09, 2020
In case of S&P 500, of the eleven sector indices, the IT sector index has been the clear winner with 31.2% gains YTD, followed by the consumer discretionary (+27.8%), communication services (+9.3%), and materials (+8.3%) indices. Meanwhile, the laggards have been energy (-48.8%), financials (-18.0%), and real estate (-4.7%) indices. Contradictorily, the consumer discretionary sector has defied the historic trend of being more sensitive toward recession (consumers tend to postpone their discretionary spending during recession) and became a leading sector.
The S&P 500 index is up 7.6% YTD (as of October 09, 2020), attributed to a splendid performance by a few giant tech companies, such as Apple, Amazon, and Microsoft. The S&P 500 index, which is weighted by the market value of its constituent companies, recovered mainly due to the rally in the share prices of these mega stocks. The trend of only certain sectors boosting overall indices is observed across both developed and emerging countries.
Conversely, the recovery in sectors after the crash on March 18, 2020 has remained uneven, as the consumer discretionary sector has outperformed the IT sector in certain indices. For instance, post March 18, 2020, S&P 500’s consumer discretionary sector index returned 78.2% YTD versus 63.2% YTD rise in the IT sector. Similar asymmetric outperformance can be observed across various geographies.
Figure 2: Equity markets – Sector-wise performance (since lowest level on March 18, 2020)
Indices/Sectors Performance |
Development Markets |
Emerging Markets |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
MSCI World |
S&P 500 |
STOXX 600 |
FTSE 350 |
TOPIX |
KOSPI 200 |
MSCI EM |
SSE Composite |
SENSEX |
HANG SENG |
Refinitiv GCC |
|
45.5% |
45.5% |
32.4% |
21.6% |
29.6% |
47.1% |
42.5% |
19.9% |
40.3% |
8.2% |
31.2% |
|
Health Care | 32.6% | 29.7% | 20.6% | 29.4% | 29.7% | 74.7% | 64.1% | 49.6% | 74.9% | 48.3% | 56.8% |
Information Technology | 67.1% | 63.2% | 69.1% | 45.4% | 48% | 49.5% | 61.2% | 9.5% | 90.3% | 88.1% | 30.1% |
Consumer Staples | 21.5% | 18.8% | 18.2% | 17.9% | 14.3% | 26.3% | 28.8% | 68.1% | 22.5% | 33.3% | 48% |
Consumer Discretionary | 78% | 78.2% | 64.6% | 15.5% | 16.4% | 64.1% | 74.4% | 48% | 33% | 54.9% | 58.3% |
Financials | 32.2% | 32.6% | 47.4% | 41.1% | 14.8% | 35.8% | 10.6% | 10% | 18.8% | -1.4% | 24.4% |
Industrials | 51.4% | 50.6% | 58.2% | 43.1% | 39.9% | 37.9% | 29.8% | 25.8% | 28.1% | 40.2% | 41.1% |
Utilities | 20.2% | 16.4% | 21.8% | -2.2% | 31.1% | 26.5% | 14.2% | 9.8% | 14.8% | -12.8% | 24.1% |
Materials | 62.8% | 62.2% | 53.3% | 52.7% | 7.6% | 38.7% | 57.3% | 24% | 41.9% | 36.6% | 49.3% |
Energy | 32.1% | 29.9% | 28.9% | 2.2% | 11.5% | 103.1% | 40.8% | -0.1% | 90% | 2.3% | 20.4% |
Real Estate | 26.2% | 27.1% | 28% | 17.3% | 22.6% | 44.8% | 13.6% | 6.5% | 12.9% | 2.7% | 34.2% |
Communication Services | 40% | 39.2% | 6.8% | 5% | 41.5% | 73.3% | 44.2% | -3.9% | 11.4% | 0% | 27.6% |
Source: Refinitiv; performance as of October 09, 2020
Leading Sectors
Information Technology
The US tech stocks emerged as the biggest beneficiaries, as they consolidated their businesses during the lockdown. Investor sentiments were also positive, as they perceived IT to turn up as the strongest sector in the post COVID-19 world. Furthermore, lockdown and containment measures bolstered the demand for IT services, as rising number of organizations opted for automation and developing work-from-home infrastructure. S&P 500, being a market capitalization weighted index, has been propelled by the rise in market capitalization of tech companies in the US, such as Apple and Microsoft. For instance, Apple became the first company to reach market value of USD2 trillion. The rise in the share prices of these massive tech companies has offset the stragglers in other sectors. However, performance among IT sector stocks remained significantly asymmetric, with stocks of companies such as Nvidia Corp. and PayPal surging approximately 134% and 82% YTD, respectively, while those of Xerox and Western Digital plummeting by approximately 46% and 40%, respectively. Globally, the IT sector stocks have witnessed the same trend, augmenting the rally in major global indices.
Consumer Discretionary
The US economy witnessed a record quarterly contraction of 32.9% in Q2 2020, due to economic slowdown and COVID-19-induced business disruption. The resultant lockdown, containment, and social distancing measures have discouraged consumers from traveling to tourist places, attending large gatherings, and visiting brick-and-mortar stores. Moreover, economic uncertainty, high unemployment levels, and declining consumer confidence have led to lower consumer spending. As a result, the consumer discretionary sector, which is proven sensitive toward recession, has been significantly impacted. However, currently, the overall sector has defied the historic trend, mainly because of boost from Amazon. S&P 500’s consumer discretionary index rose 27.8% YTD, mainly on account of a surge in share prices of Amazon (around 78% YTD), as the current scenario is well-suited for its business model due to the rise in online shopping.
Healthcare
The healthcare sector has found itself at the forefront of this crisis. It has witnessed acceleration in growth, as people have now become increasingly health conscious. The stock prices of companies in this sector have surged, with earnings being relatively less impacted. Healthcare will likely emerge as one of the most robust sector in the post-COVID-19 world. The anticipated future growth in healthcare expenditure has also bolstered the stock prices of companies in this sector. The surge in these stocks is common across geographies, thus contributing to the recovery in majority of the global indices.
Communication services
Performance of the communication services sector remained mixed across global indices. However, it rose in S&P 500, mainly because of companies such as Alphabet Inc. and Facebook. MSCI World, MSCI EM, TOPIX, KOSPI 200, and Refinitiv GCC are other indices that witnessed positive returns in shares of the communication services sector.
Lagging Sectors
Energy was the worst performing sector owing to the sharp decline in crude oil demand, coupled with positive supply shocks. Crude oil prices spiraled down as lockdown measures across the globe led to subdued oil demand. Moreover, the pandemic has significantly impacted the earnings and cash flows of companies in the oil & gas sector, thereby leading to a rise in the number of bankruptcies and defaults. Hence, the energy sector turned out to be a major drag on global indices.
The utilities sector was also adversely affected by the pandemic, as lockdown and social distancing measures led to the closure of workspaces, restaurants, retail stores, etc. The demand for utility services declined significantly, leading to a drop in share prices of companies in this sector.
The shadow of US House investigation and anti-trust hearings on tech stocks
The ongoing US House of Representative’s enquiry into Big Tech’s business practices has concluded that the tech companies are monopolistic. Consequently, the final report is expected to recommend actions in some form, possibly ranging from fines to more regulatory oversight. Although large tech behemoths, such as Apple, Facebook, and Google, may not likely be broken up into smaller entities with separate ownership, any action with long-term impact would affect these stocks negatively, and thus exert pressure on broader indices.
Conclusion
While majority of the stock market indices have recovered sharply from their March 2020 trough, the rally in indices is bolstered only by the stocks of certain sectors. Most of the other sectors have not yet recovered, and narrow-minded perception of headline indices can be misleading. In case of market cap weighted indices, such as S&P 500, the weightage of select stocks have increased significantly, and these stocks further exacerbate their contribution to headline index movement. Hence, in the event of these stocks witnessing a steep correction, the index would also correct its trend, as the rest of the sectors are not in a position to offset the weakness.
Harsh Shah
Mayur Dhawale
