Market Outlook

Amazon’s share price and other tech stocks mask underperformance elsewhere

Amazon’s [AMZN] share price has typified investors’ excitement for tech stocks in recent months, soaring 89.83% since a mid-March low to close at a closing all-time high of $3,182.63 on 9 July. 

While stay-at-home orders have hindered many businesses’ operations, Amazon’s share price has been booming. A surge in demand led to a 26% increase in net sales to $75.5bn for the online retailer in the first quarter.

Amazon’s share price has not been the only one to benefit from the shift towards home-centric living. Tech stocks which make it easier for staff to work from home have also seen gains. Video conferencing platform Zoom’s share price, for example, has risen 287.54% since the start of the year, to close at $266.32 on 8 July.

Biotech stocks have also remained buoyant, as firms like Gilead Sciences [GILD] and Moderna’s [MRNA] work towards finding a COVID-19 vaccine has seen their respective share prices rise. As a consequence, the SPDR S&P Biotech ETF [XBI] has surged from $89.18 at the end of February to $116.77 (through 8 July’s close).

Energy stocks are also up, despite oil price dips as consumers and businesses cut demand. Apache Corporation’s [APA] share price is up from a low of $4.31 on 23 March to $13.07 through 8 July’s close, while Marathon Oil’s [MRO] share price climbed from $3.63 on 9 March to $5.68 as of 8 July’s close.

Investors are anticipating further boosts for these share prices as lockdown measures significantly ease. The energy sector had surged by around 26% for the second quarter to 24 June, according to The Wall Street Journal and Dow Jones Market Data. 

These three industries have helped the S&P 500 rise 41.68% since mid-March’s market slump, as well as driving the Nasdaq up by 67.03% over the same period. But this strong performance masks an inconvenient truth. 


Utilities and real estate firms suffer 

While some sectors have soared in recent weeks, many have continued to suffer badly. Sectors including utilities and real estate have been hit hard, and are likely to continue struggling. Utilities stocks were up just 1.9% for the second quarter to 24 June, and real estate stocks were up 9.6%, according to The Wall Street Journal.

The Utilities Select Sector SPDR Fund [XLU] rose just 9.3% during the second quarter — compared to the Nasdaq’s 36.7% rise. Stocks such as Consolidated Edison’s share price [ED] fell 6.3% over the same period as investors fret over how coronavirus is impacting demand for electricity and gas from consumers and businesses.

There have also been concerns that utilities firms, usually a safe haven amid market volatility, may look to cut or suspend dividends.

“Utility investors are not used to uncertainty,’’ Jeremy Tonet, an equity research analyst at JP Morgan told The Wall Street Journal in June. “There were a lot of concerns with regard to COVID-19 and how much it could impact the space.”

Real estate prices have also crumbled. Simon Property Group [SPG], which owns more than 200 enclosed shopping malls, saw its share price dive from $123.08 on 28 February to $64.41 as of 8 July’s close, as footfall dropped. 

“Utility investors are not used to uncertainty” - Jeremy Tonet, equity research analyst at JP Morgan

That said, there are bright spots within the industry. QTS Realty Trust [QTS], a real estate investment trust that owns and manages data centres, saw its share price climb from a mid-March low of $43.98 to return to pre-crisis levels of circa $66 by late April — it closed at $66.35 on 8 July. The popularity of data centres has risen as more enterprises are looking to store information on the cloud.

Industrial property has also proved resilient, as ecommerce deliveries have created a surge in demand for warehouse space.


Will lifting lockdown lift share prices?

Analysts have expressed hope for Simon Property Group as shopping malls begin to reopen and social distancing measures ease. 

“As businesses reopen, [Simon Property Group’s] rental income will recover. And if the economy rebounds back to pre-COVID-19 levels, the stock will rebound back to the $100 levels in a hurry,” said Chris Lau, in InvestorPlace.

The prospect of a second lockdown caused by a new wave of COVID-19 could complicate things further, however, and make it harder for real estate and utilities companies to stage a recovery. In addition, the Energy Information Administration expects electricity consumption to decline by 5.7% in 2020.

Despite this, dividends in the sector remain attractive. California-based utilities company Edison International [EIX], for example, could interest investors with its dividend yield of 4.7% and a five-year average growth rate of 10.8%, Thomas Niel writes in InvestorPlace.

“If the actual risk winds up being lower than it has been perceived, expect this name to bounce back,” Neil says. “Before the crisis, shares traded just above $75 per share. With the stock now changing hands around $55 per share, that’s major potential share price upside in a recovery.”


Can anything stop tech’s rally?

It’s not just the sectors that have struggled so far that need to watch out, though. Tech is also vulnerable to reduced consumer appetites in the event an economic downturn, as people may scale back their Amazon orders or iPhone updates. There are also question marks over advertising boycotts affecting social media giants like Facebook [FB].

Stalwarts such as Microsoft [MSFT] will likely prove resilient. Demand for Microsoft Teams has grown as more remote workers sign up to Microsoft Office packages. At the end of March, Microsoft Teams recorded a record 2.7 billion meeting minutes in a single day, up from 900 million two weeks earlier, prior to lockdown.

Energy, on the other hand, will have to fight against long-term challenges to the industry, as demand for green alternatives picks up speed. Renewable energy may continue to prove its worth if infrastructure investments continue to be relatively pandemic-proof. One renewable energy firm, Solar Edge Technologies [SEDG], is tipped by analysts at Zacks to grow sales by 5.2% this year to $1.5bn. The stock is up 55.11% for the year to date through 8 July’s close.

Despite an increased number of delivery vans dropping off Amazon parcels over recent months, lots of people have enjoyed the cleaner air and skies we’ve seen during lockdown. Renewables may well benefit from this sentiment in the months ahead.

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