FTSE 100: Assessing the winners and losers from Covid-19

Financial markets have been on a wild ride so far during the Covid-19 crisis. The volatility caused and the economic disruption expected is something that we never thought that we would see in our lifetimes. The FTSE 100 has declined approx. 40% from peak to trough and any recoveries have been modest so far. While there are good reasons why markets remain volatile, eventually there will be a turn in market sentiment. At this stage, when the outlook for stock prices is fuzzy and it is difficult to tell where the low is for a market, it is a useful exercise to assess which companies and sectors may recover faster than others. 

Rather than go through each component of the FTSE 100 in this note, we have chosen five companies and below we give our assessment for their future. 

The winners: 

1, GlaxoSmithKline (GSK) 

It’s share price has fallen approx. 25% from peak to trough during this outbreak. The fact a pharma giant that is a major player in the global healthcare sector also experienced a sell-off in its share price shows just how indiscriminate the selling was in recent weeks. GSK’s share price is down nearly 2% on Wednesday, which is lower than the overall decline in the FTSE 100. We remain upbeat that when the market starts to turn, GSK could be one of the outperformers. It delivered a decent set of results for 2019, which leaves it in a good financial position to weather the Covid-19 storm. Also, on 9thApril GSK is expected to pay its dividend to shareholders. So far, there has been no news that this will be delayed or suspended. If it is suspended then we could see GSK sell off, however, if it goes ahead as we expect, then we may see GSK look extremely attractive in a field where dividends are harder to find. 

Added to this, we are witnessing the declines in some companies share prices of 80-90%, thus, with only a 25% decline GSK looks like a decent safe haven even in these uncertain and unpredictable times. In future, GSK’s decent performance during the Covid-19 crisis could make it a solid feature in more peoples’ portfolios than ever before. 

Lastly, big pharma can be an unwieldly beast, hence why investors may not be rushing to buy the stock because they may not think that a pharma giant can produce a vaccine fast enough to bring an end to Covid-19. However, GSK is due to undergo a structural change that will see the business split in two: the first part is a joint venture in consumer healthcare with Pfizer, the second is a dedicated research and development business. This structural change has happened at just the right time and it could make GSK nimbler at developing new vaccines and aspects of healthcare, which are likely to be in high demand going forward. 

2, Unilever: 

Like GSK, Unilever has not seen its share price fall as far as some other companies on the FTSE 100. It has fallen 17% from peak to trough since the start of March, thus it belongs in the category of FTSE 100 members that are weathering the Covid-19 storm. It is obvious why Unilever is in demand: a major producer of soap, cleaning products, antibacterial gels and staple food stuffs. Looking to the future, we expect that habits will change once this crisis is behind us, with handwashing and extra hygiene measures like regular use of hand sanitiser likely to become a normal part of our everyday lives. Thus, revenues from these products may continue to grow strongly in the years ahead. On top of this, Unilever already has a strong balance sheet, with a more than EUR 4bn in cash on its balance sheet. This is important for its dividend. Unilever’s dividend has seen strong growth in recent quarters, and the dividend yield is a decent 3.6%. While there is some concern about the safety of dividend payments with a deep recession expected to be on the horizon, Unilever is well positioned to continue to pay this dividend due to its large cash position, which is likely to increase its attractiveness. Due to these factors, any further weakness in the Unilever share price could provide a decent buying opportunity, and it could stage a strong recovery once the market turns. 

3, Tate & Lyle  

The obvious choice would be the supermarkets who have seen an extra £2bn of sales in the month of March alone. However, buying the supermarkets is too obvious for us, there is more value to be had further down the food chain. Instead, companies such as Tate & Lyle, the maker of sweeteners, sugars, syrups, a range of other food stuffs and animal food stuffs is likely to be a big winner from the Covid-19 crisis. Its products have been in huge demand as people turn to home cooking and baking to while away the hours while we are all in lockdown. Not only are future sales and revenues likely to remain strong, but in this environment, investors may regard those companies with strong fundamentals going into this crisis particularly favourably. Tate & Lyle also meet these criteria, as it produced a decent set of 2019 results with profits rising more than 50%. While its lack of dividend could be off-putting for some, we believe that its product range should make up for it. 

4, Banks

Ok, this is a sector, not an individual company, but Wednesday’s declines in the share price of some of the biggest banks could attract some buying interest in the coming days. Banks have unprecedented levels of support from central banks to weather any wave of bad loans that could be triggered by this crisis, while low interest rates will be a problem for profitability down the line, we believe that banks may still be one of the early sectors to recover. If we had to choose one bank, we would probably go with HSBC due to its exposure to Asia, where Covid-19 looks to be plateauing and where the economy may enter a recovery phase before Europe and the US. 

The losers 

5, EasyJet and Ryanair 

The airline sector has been one of the worst effected during this crisis with airlines forced to ground whole fleets. Added to that, government support for airlines has hardly been forthcoming. It may seem obvious to choose EasyJet and Ryanair as the stocks we like the least; however, we believe that the long-term ramifications for these two low cost airlines could weigh on their share price for the long term. Firstly, they fly to the major holiday destinations around Europe and people may think twice before booking a holiday to a destination in Spain or Italy, countries that have been ravaged by coronavirus. Thus, it could take some time before travel gets back to normal. Secondly, with a major recession expected, this could also hinder the recovery for companies such as EasyJet and Ryanair that specialise in “discretionary travel”, as fewer people can afford holidays. Lastly, larger airlines such as British Airways (owned by IAG) have solid links and routes in Asia, which is starting to open back up as Covid-19 recedes in the region. Thus, BA and other airlines may be able to re-start their fleets ahead of EasyJet and Ryanair, which could see these two airlines lag their rivals when the stock market recovery eventually takes place.