Structural changes are on fast forward

EQUITIES

5 POINT SUMMARY OF THIS ARTICLE

1

2

3

4

5

Dominant companies taking market share

Growth in adoption of new technologies will continue to increase

Oil prices are likely to stabilise in the near term

Banks face challenges and remain under pressure

Hitting the bottom of the cycle for cyclicals

Covid-19 is one of the greatest shocks to business for a century. The lockdown and its ripple effects are speeding up significant structural changes that were already under way before the crisis struck.

Even when lockdown restrictions are eased, the coronavirus will continue to affect our lives in many ways. Those businesses that are in good financial health and able to adapt to customers’ needs should prosper. However, any weaker players already grappling with falling sales, rising costs and intense competition are likely to have an anaemic recovery or even fall by the wayside.

In a contest where only the fittest will survive, the largest companies that already dominate their sectors are likely to be the winners. They will be able to invest in their business models to grow market share even further, acquire smaller competitors at distressed prices, and expand their operations into new areas where they see emerging opportunities.

Dominant companies taking market share

1

Growth in adoption of new technologies will continue to increase 

2

An even larger share of our lives has moved online since we’ve been quarantined at home, speeding up the trend from physical to digital that has been under way for some time. For many people and businesses, there will be no turning back when the lockdown eases. They’ll continue to do the things that have proven to be easier, faster and cheaper.

Digital platforms have become the only way for many of us to work, as well as be educated and entertained. Typically, the adoption rate for new technologies is slow in the early phases, but out of necessity, we’ve been forced to adapt – from buying food online to holding virtual meetings with colleagues, family and friends.

As many of these trends accelerate, companies that offer their products and services online are likely to continue to take market share from their traditional competitors, and enjoy long-term profits growth. Businesses in sectors that are not able to adapt to the new world are going to come under intense pressure, including travel, high-street retail and real estate.

A number of technology trends have been given a significant boost from this crisis. Many of these have either explicit or implicit sustainable characteristics. The most powerful include the continuing switch to digital payments, as well as the adoption of electric vehicles as images of a reduction in air pollution across the world’s major cities resonates with both consumers and policymakers. Even connected digital fitness equipment appears to be more convenient and effective than gyms for a lot of people.

Oil prices are likely to stabilise in the near term 

3

Crude oil prices have plummeted this year, as demand for the commodity collapsed following social distancing measures introduced by governments to combat the coronavirus outbreak. For the first time in history, they even turned briefly negative when traders became concerned that storage facilities were probably full. We expect prices to remain low and volatile in the short term owing to a glut of supply and depressed demand.

Over the medium term, prices should recover as the global economy reopens for business and demand picks up. Oil producers will have an incentive to increase supply only gradually in order to push prices higher. For example, Saudi Arabia needs prices to achieve at least $70 a barrel in order to balance its budget.

The energy sector has suffered substantial share price falls this year, which we expect will recover when oil prices pick up. Yet over the longer term, this industry is in steady decline. As the world moves towards a low-carbon future, companies producing energy from renewable sources, such as wind and solar, as well as those involved in battery storage, offer more sustainable investment opportunities.

Banks face challenges and remain under pressure 

4

Banks face a challenging environment of low or negative interest rates, flat yield curves, higher credit risks and depressed economic activity. Although most are in much better health than they were during the 2008 financial crisis and have stronger balance sheets, changes to accounting practices mean provisioning losses are likely to be larger and occur earlier than in previous downturns.

Across various measures of value, share prices appear cheap compared with the past. However, given the uncertainty surrounding credit risk, we don’t believe valuations are attractive at the moment. Many banks are suspending their dividend payments to make sure they have enough capital to cover defaulted loans.

Another headwind is the ongoing pressure from new fintech challengers, which are harnessing technology to speed up their processes and drive down costs. When looking for investment opportunities in the financials sector, we’re attracted to innovative companies. They include selective trading exchanges, specialist insurance companies, some fund managers and payment processors.

Many of the most innovative companies not only provide a practical service, but they also reflect people’s lifestyle choices and beliefs. For example, some payment processors are facilitating incremental saving or charitable giving, while many fund managers are embracing sustainable investing.

Hitting the bottom of the cycle for cyclicals

5

Companies in cyclical sectors tend to sell discretionary items that consumers spend less on during a recession. Their share prices have probably already fallen about as far as they are going to, but we remain selective about investing in these types of businesses. Although valuations look attractive, considerable uncertainty remains about the outlook for the global economy.

Many cyclical companies will need to repair their balance sheets and await a pickup in demand before they can start to deliver strong profits growth once again. The pace of any recovery for those that have been affected the most by the lockdown is likely to vary considerably. For example, in the airline industry short-haul flights will probably recover before long-haul travel.

From an investment perspective, cyclical businesses that face structural headwinds, such as traditional carmakers and high-street retail, remain unattractive. We prefer those that we see have the potential to  grow over the long term, such as semi-conductor manufacturers and copper miners, which provide the components and raw materials for our increasingly digital lives.

EQUITIES

01

As long-term investors, we’ve always focused on finding companies with a competitive advantage that will allow them to grow their profits well into the future. Typically, these companies will display strong environmental, social and governance characteristics, and many are leveraged to significant environmental and social trends. The economic disruption caused by the coronavirus pandemic means that this approach has become even more important. We’ll continue to invest in dominant companies that can use their competitive advantages, capital and scale to consolidate their positions as the crisis recedes.

Invest in a richer life,
however you define it.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.


Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement


Source: Bloomberg

88%

79%

The five largest companies in the S&P 500 by market 
value are increasingly dominant 

Cloud service taking share in software

Source: CapIQ, Bessemer Venture Partners 

As the digital revolution gathers pace, cloud services are increasingly
taking market share from the traditional model of software licenses.

Oil market Supply/Demand balance

Source: Bank of America

Million barrels per day

OPEC+ production cuts should resolve the oversupply of oil by the end of 2020

Semiconductor industry revenue growth

Source: Bloomberg 

The semi-conductor industry has already experienced a cyclical 
correction and is likely to enjoy strong growth as demand picks up

Many European banks have complied with the ECB’s requests by cancelling or 
delaying dividends and share buy-back schemes

1980

Today

12%

88%

21%

79%

Structural changes are on fast forward

EQUITIES

5 POINT SUMMARY OF THIS ARTICLE


1

Dominant companies taking market share

Growth in adoption of new technologies will continue increase

Oil prices are likely to stabilise in the near term

Banks face challenges and remain under pressure

Hitting the bottom of the cycle for cyclicals

2

3

4

5

Covid-19 is one of the greatest shocks to business for a century. The lockdown and its ripple effects are speeding up significant structural changes that were already under way before the crisis struck.

EQUITIES

01

Dominant companies taking market share

1

Even when lockdown restrictions are eased, the coronavirus will continue to affect our lives in many ways. Those businesses that are in good financial health and able to adapt to customers’ needs should prosper. However, any weaker players already grappling with falling sales, rising costs and intense competition are likely to have an anaemic recovery or even fall by the wayside.

In a contest where only the fittest will survive, the largest companies that already dominate their sectors are likely to be the winners. They will be able to invest in their business models to grow market share even further, acquire smaller competitors at distressed prices, and expand their operations into new areas where they see emerging opportunities.

As long-term investors, we’ve always focused on finding companies with a competitive advantage that will allow them to grow their profits well into the future. Typically, these companies will display strong environmental, social and governance characteristics, and many are leveraged to significant environmental and social trends. The economic disruption caused by the coronavirus pandemic means that this approach has become even more important. We’ll continue to invest in dominant companies that can use their competitive advantages, capital and scale to consolidate their positions as the crisis recedes.

Growth in adoption of new technologies will continue increase

2

The energy sector has suffered substantial share price falls this year, which we expect will recover when oil prices pick up. Yet over the longer term, this industry is in steady decline. As the world moves towards a low-carbon future, companies producing energy from renewable sources, such as wind and solar, as well as those involved in battery storage, offer more sustainable investment opportunities.

Source: Bank of America

OPEC+ production cuts should resolve the oversupply of oil by the end of 2020

An even larger share of our lives has moved online since we’ve been quarantined at home, speeding up the trend from physical to digital that has been under way for some time. For many people and businesses, there will be no turning back when the lockdown eases. They’ll continue to do the things that have proven to be easier, faster and cheaper.

Digital platforms have become the only way for many of us to work, as well as be educated and entertained. Typically, the adoption rate for new technologies is slow in the early phases, but out of necessity, we’ve been forced to adapt – from buying food online to holding virtual meetings with colleagues, family and friends.

As many of these trends accelerate, companies that offer their products and services online are likely to continue to take market share from their traditional competitors, and enjoy long-term profits growth. Businesses in sectors that are not able to adapt to the new world are going to come under intense pressure, including travel, high-street retail and real estate.

A number of technology trends have been given a significant boost from this crisis. Many of these have either explicit or implicit sustainable characteristics. The most powerful include the continuing switch to digital payments, as well as the adoption of electric vehicles as images of a reduction in air pollution across the world’s major cities resonates with both consumers and policymakers. Even connected digital fitness equipment appears to be more convenient and effective than gyms for a lot of people.

Oil prices are likely to stabilise in the near term 


3

Crude oil prices have plummeted this year, as demand for the commodity collapsed following social distancing measures introduced by governments to combat the coronavirus outbreak. For the first time in history, they even turned briefly negative when traders became concerned that storage facilities were probably full. We expect prices to remain low and volatile in the short term owing to a glut of supply and depressed demand.

Over the medium term, prices should recover as the global economy reopens for business and demand picks up. Oil producers will have an incentive to increase supply only gradually in order to push prices higher. For example, Saudi Arabia needs prices to achieve at least $70 a barrel in order to balance its budget.

Many European banks have complied with the ECB’s requests by cancelling or delaying dividends and share buy-back schemes


Banks face a challenging environment of low or negative interest rates, flat yield curves, higher credit risks and depressed economic activity. Although most are in much better health than they were during the 2008 financial crisis and have stronger balance sheets, changes to accounting practices mean provisioning losses are likely to be larger and occur earlier than in previous downturns.

Across various measures of value, share prices appear cheap compared with the past. However, given the uncertainty surrounding credit risk, we don’t believe valuations are attractive at the moment. Many banks are suspending their dividend payments to make sure they have enough capital to cover defaulted loans.

Another headwind is the ongoing pressure from new fintech challengers, which are harnessing technology to speed up their processes and drive down costs. When looking for investment opportunities in the financials sector, we’re attracted to innovative companies. They include selective trading exchanges, specialist insurance companies, some fund managers and payment processors.

Many of the most innovative companies not only provide a practical service, but they also reflect people’s lifestyle choices and beliefs. For example, some payment processors are facilitating incremental saving or charitable giving, while many fund managers are embracing sustainable investing.

Banks face challenges and remain under pressure 


4

Banks face challenges and remain under pressure 


4

Hitting the bottom of the cycle for cyclicals


5

Companies in cyclical sectors tend to sell discretionary items that consumers spend less on during a recession. Their share prices have probably already fallen about as far as they are going to, but we remain selective about investing in these types of businesses. Although valuations look attractive, considerable uncertainty remains about the outlook for the global economy.

Many cyclical companies will need to repair their balance sheets and await a pickup in demand before they can start to deliver strong profits growth once again. The pace of any recovery for those that have been affected the most by the lockdown is likely to vary considerably. For example, in the airline industry short-haul flights will probably recover before long-haul travel.

From an investment perspective, cyclical businesses that face structural headwinds, such as traditional carmakers and high-street retail, remain unattractive. We prefer those that we see have the potential to  grow over the long term, such as semi-conductor manufacturers and copper miners, which provide the components and raw materials for our increasingly digital lives.

Invest in a richer life,
however you define it.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 June, 2020 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.

Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved. Privacy Statement


Source: Bloomberg

Source: CapIQ, Bessemer Venture Partners 

As the digital revolution gathers pace, cloud
services are increasingly taking market share
from the traditional model of software licenses.

Source: Bloomberg 

The semi-conductor industry has already experienced a cyclical correction and is likely to enjoy strong growth as demand picks up

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Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.
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Seeing the world differently

Counterpoint July 2020 is our first digital monthly edition of Counterpoint. Each month we will add a new edition to this library to keep you up to date on our macroeconomic and market views.

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