As a growing number of US states have
started to incrementally reopen their economies (under a variety of measures
such as mask usage and capacity restrictions), we got our first official look
at COVID-19’s toll on the nation’s economic output. The federal government
announced on Wednesday that US gross domestic product (GDP) fell 4.8% in the
first quarter.1 That’s the fastest rate of decline since the fourth
quarter of 2008, when US GDP fell 8.4%, and it was driven by a drop in consumer
spending not seen since 1980.2 Later on Wednesday, the Federal Reserve
issued a statement affirming its commitment to use “its full range of tools to
support the US economy in this challenging time.”
While broad data points can give us a good overview of
where the economy currently stands, it’s important to remember that each industry,
each US state and each global region will experience its own unique path toward
recovery. With that in mind, I’ve asked a variety of Invesco portfolio managers
to talk about their areas of expertise, and the possibilities that they see
Grubbs, Managing Director and Head of US Funds Management for Invesco Real
Bellman, Managing Director and Head of Global Research, Invesco Real Estate
Portera, Chief Investment Officer, High Yield and Multi-Sector Credit, Invesco
Jurkash, Senior Portfolio Manager and Co-Lead, US Value Equities team
Titus, Senior Portfolio Manager and Co-Lead, US Value Equities team
Peden, Senior Portfolio Manager, International Select Equity team
Direct real estate: Three sectors that may be resilient
in this environment
William Grubbs & Tim Bellman: The
COVID-19 pandemic has led to a major disruption of the global economy; it is
not a typical recession. Both the emergency itself and the varying policy
response in different countries have consequences for real estate worldwide:
- Asset management. The
public health emergency has demanded swift and decisive measures by real estate
asset managers and property managers.
- Portfolio management. The
unfolding economic crisis will demand a measured response depending on the
depth and duration of the period of dislocation.
- Capital markets. The
turmoil may generate transaction opportunities if a level of stress and
distress leads to the potential to recapitalize otherwise sound real estate.
The depth of the slowdown and potential shape of the
recovery are hard to predict. They likely vary from city-to-city and
country-to-country. Looking forward, what can we have conviction about? Long-term
trends. Real estate themes that flow from secular trends in technology and
demography that were driving forces pre-COVID-19 which have been accelerated
- Logistics. This
sector includes warehouses, distribution facilities, and fulfillment centers,
and we believe its position as a strong outperforming sector has been
In our view, prime central business district locations and
innovation/life science hubs are likely to have strong performance.
- Multi-family. This
sector may be resilient in the slowdown; it is possible to maintain occupancy.
Before COVID-19, Asia Pacific appeared relatively
well-placed with stronger economic growth driving real estate demand in major
markets. Direct real estate in Asia outperformed Europe and North America
slightly in the fourth quarter of 2019. As waves of the pandemic ripple out
across the world from Asia Pacific, ironically Asia Pacific real estate
continues to look relatively well-positioned in the near-term, in our view. But
in time, once the economic restart is under way, we believe the dynamism of the
US private sector economy is likely to power relatively strong performance.
Multi-sector credit: The ‘new normal’ may be
driven by 5G and automation
Joe Portera: COVID-19
has wreaked havoc on global markets, but it has also presented investors with
compelling investment opportunities. We believe this pandemic will have
lasting impacts on economies via behavioral shifts, some of them likely to be
permanent. At the center of it all we have witnessed technology taking an even
more central role within each industry. Disruptions in everything from supply
chains to education have put additional pressure on innovators to develop,
manufacture, and deploy solutions at record speeds. Over the past 12 to 18
months, one of our highest-conviction themes was in technology, media and
communications (TMT), specifically focusing on 5G and automation.
Our favorable outlook in TMT is supported by
an accelerated shift in the economy. As populations and behaviors adapt to
the new normal, we believe 5G will be an instrumental catalyst for unlocking a
new technological revolution built on the force of unprecedented connectivity
in terms of speed, capacity, and coverage. This in turn may allow
implementation of robotics, artificial intelligence, and distributed cloud
computing in the industrial sphere like never before. Some examples of trial
technologies like self-driving and drones may get pushed forward towards
reality. A disruption in the food supply chain due to issues with trucking
networks, or an inability to deliver critical medical supplies to someone just
a few miles away, when no contact is a key criteria, are just some of the
challenges these technologies aim to answer.
In addition to our positive fundamental
outlook, valuations in recent months have become more attractive, in our view. A
great deal of default risk is currently priced into the high-yield market – by
our calculations, prices reflect an expectation of roughly twice the credit
losses ultimately incurred during the 2008 global financial crisis. There have
been only a few times in history when spreads between high-yield bonds and
Treasuries have been wider than they are now. In each of those previous
occasions, the market was able to generate substantial forward gains as
investors scooped up bargains not readily available under more normal market
While markets are beginning to stabilize, we
believe the combination of fundamental drivers and attractive valuations
provide for appealing investment opportunities. Without question, this crisis
has underscored the demand from markets for solutions and has brought to the
forefront the need for 5G to facilitate the implementation of those solutions.
Value stocks: Could cheaper stocks experience a stronger
Brian Jurkash & Matt Titus. For
more than a decade, large-cap US growth stocks have outperformed large-cap US
value stocks.3 However, we believe this current market sell-off may
have created an opportunity for value to come back into favor. In March,
valuation spreads — which measure the difference between the market’s most
expensive stocks and its cheapest stocks — hit a standard deviation of 4.5,
indicating that the difference is dramatically larger than usual.4
In fact, the only other time they have been at that level or higher was during
the Great Depression and the global financial crisis.
Why do we think this is important? Coming out of past
recessions, stocks with cheap valuations tended to lead the way, which we
believe should bode well for value managers when we come out of this one. Also,
economically sensitive sectors (financials, for example) have historically rallied
after market downturns, and value strategies tend to have a significant
overweight to these sectors versus growth managers. In comparison, growth’s
performance has been driven by technology stocks: The Russell 1000 Growth Index
has about a 40% weight in the sector versus the Russell 1000 Value Index which
has roughly 7%.5 Looking at valuation metrics such as
price-to-earnings and price-to-book ratios, the tech sector is substantially
more expensive than financials, for example.6
More broadly speaking, another factor that may help boost
stocks is the fiscal response that has occurred. This response is far greater
than what investors experienced during the global financial crisis (GFC), and
this time it only took 22 days for Congress to pass its first stimulus package,
versus almost 12 months during the GFC.7 The Federal Reserve has
also been more aggressive on monetary policy than during the prior crisis. We
are also starting to see some bright spots in terms of a decline of new
COVID-19 cases, increased recoveries, and containment. Also, many cities,
counties, and states are laying the groundwork to reopen.
Global equities: Seeking to avoid stocks with overly
Matt Peden: Equity markets have experienced a dramatic rebound
from their March lows. But as long-term focused investors, we find it difficult
to reconcile the current market valuations of many businesses with their underlying
earnings prospects given the expected impact of the novel coronavirus. For most
businesses, the coronavirus pandemic should be reasonably expected to have a
noticeable negative impact on corporate revenue, margins, and after-tax
earnings, with the magnitude of the impact dependent on the time required for
societies to gain widespread immunity (either through a viable vaccine or herd
immunity, if possible), the duration of government-imposed shutdown measures,
and the extent to which the current situation influences longer-term consumer
behavior. With most nations discussing only a gradual easing of restrictions
beginning in May, leading to lockdowns averaging six to eight weeks, the coronavirus
may have already engendered the most acute short-term economic downturn of the
post-World War II era.
The near-term economic impacts of mass business closures
and commensurate unemployment should not be underestimated. At no point during
the financial crisis did entire industries shut down for months at a time,
forcing layoffs of unprecedented scale and the loss of irrecoverable revenues
in service-based industries. Moreover, with a viable vaccine believed to be at
least 12 to 18 months away, widespread immunity remains elusive and the threat
of subsequent waves of infection will persist following any gradual easing of
initial shelter-at-home and social distancing measures. To assume that
consumers will flock back to restaurants, bars, movie theaters, shopping malls,
hotels and airplanes, while the risk of infection from a deadly virus looms,
seems overly optimistic, in our view. Hence, we expect the virus to likely have
a mid-term impact on consumer behavior, and thereby, corporate revenues and
margins beyond any easing of government-mandated restrictions.
In recognition of the gravity of the crisis, governments
around the world considerably expanded fiscal support for individuals, small
businesses, and even corporations in the most severely impacted industries. However,
this fiscal stimulus, unprecedented in size and scope, may elevate government
debt to levels not witnessed since World War II and create lasting budget
deficits due to challenges in unwinding social benefits after the crisis. As
government debt must ultimately be serviced and budget deficits must eventually
be funded from sources other than more borrowing, corporate and/or individual
taxation may need to increase post-crisis. A corporate tax increase to fund the
immense current stimulus programs would negatively impact equity values, in our
view. Alternatively, any increase in personal tax rates would reduce disposable
income and may constrain long-term consumer spending. At the time of writing,
the S&P 500 Index was trading at mid-2019 levels and the MSCI World Index at
early 2019 levels. Assuming that current intrinsic business values are equal to
or higher than underlying values eight to 12 months prior to the coronavirus
outbreak is illogical, in our view, indicating that investors may be
incorporating overly optimistic assumptions into prevailing market prices.
Given the severity of the coronavirus situation in the
US, the more exaggerated market recovery across US equities, and the greater
magnitude of stimulus measures enacted within America (and thereby higher
probability of future tax increases), we are presently seeing more attractive
investment opportunities amongst the international companies we own and follow
compared to their US peers. In other words, we believe the disparity between
business values based on rational expectations and market prices appears most
pronounced in US equity markets, with current prices in many cases reflecting
overly optimistic assumptions. In addition to the disparity between US and international
valuations, we continue to see a discrepancy between large- and small-cap
valuations, with small-cap valuations continuing to remain more attractive, in
our view. Our team seeks to avoid companies and areas where we believe excessively
optimistic underlying business performance assumptions are imbedded in current
market prices. Instead, we focus on a select number of businesses that we
believe are rationally priced, high performing, and competitively entrenched.
Read more blogs in this series:
As earnings season
looms, portfolio managers look for long-term opportunity
discuss the risks and opportunities ahead
Where do portfolio managers see opportunity in today’s environment?
1 Source: US Bureau of Economic Analysis, as of April 29,
2 Source: The Wall Street Journal, “U.S. Economy Shrank
at 4.8% Pace in First Quarter,” April 29, 2020
3 Based on the Russell 1000 Growth Index and Russell 1000
4 Source: National Bureau of Economic Research, Empirical
Research Partners Analysis. Based on price-to-book data of the largest 1,500
5 Source: FactSet Research Systems, as of March 31, 2020
6 Source: Bloomberg, L.P.
7 Source: Credit Suisse
Blog header image: Marcin Jozwiak / Unsplash
Investments in real estate related
instruments may be affected by economic, legal, or environmental factors that
affect property values, rents or occupancies of real estate. Real estate
companies, including REITs or similar structures, tend to be small and mid-cap
companies and their shares may be more volatile and less liquid.
Fixed-income investments are subject to credit
risk of the issuer and the effects of changing interest rates. Interest rate
risk refers to the risk that bond prices generally fall as interest rates rise
and vice versa. An issuer may be unable to meet interest and/or principal
payments, thereby causing its instruments to decrease in value and lowering the
issuer’s credit rating.
A value style of investing is subject to the
risk that the valuations never improve or that the returns will trail other
styles of investing or the overall stock markets.
Many products and services offered in
technology-related industries are subject to rapid obsolescence, which may
lower the value of the issuers.
Investments in financial institutions may be
subject to certain risks, including the risk of regulatory actions, changes in
interest rates and concentration of loan portfolios in an industry or sector.
The risks of investing in securities of
foreign issuers can include fluctuations in foreign currencies, political and
economic instability, and foreign taxation issues.
Stocks of small and mid-sized companies tend
to be more vulnerable to adverse developments, may be more volatile, and may be
illiquid or restricted as to resale.
Standard deviation is a measure of the amount
of variation or dispersion of a set of values. A higher standard deviation
indicates a bigger variation from the mean.
spread is the difference in yield between bonds of similar maturity but with
different credit quality.
The price-to-book (P/B) ratio
is calculated by dividing the market price of a stock by the book value per
The price-to-earnings (P/E)
ratio measures a stock’s valuation by dividing its share price by its earnings
Russell 1000® Growth Index, a trademark/service mark of the Frank Russell Co.®,
is an unmanaged index considered representative of large-cap growth stocks.
Russell 1000® Value Index, a trademark/service mark of the Frank Russell Co.®,
is an unmanaged index considered representative of large-cap value stocks.
S&P 500® Index is an unmanaged index considered representative of the US
The MSCI World Index is
an unmanaged index considered representative of stocks of developed countries.
The opinions referenced above are those of the author as of April
30, 2020. These comments should not be construed as recommendations, but as
an illustration of broader themes. Forward-looking statements are not
guarantees of future results. They involve risks, uncertainties and
assumptions; there can be no assurance that actual results will not differ
materially from expectations.