27 July 2020 - 14:09The textbook definition for defensive companies is that they are those that tend to outperform the general market when economic growth slows. They provide more consistent free cash flow and stable earnings growth profiles regardless of the state of the overall market or economy.
Every crisis in financial markets has different winners and losers. Covid-19 turned the traditional defensive plays on their head. Hospital capacity and availability were at the forefront of why country lockdowns were needed. Alcohol is viewed as a risk to the availability of hospital capacity, leading to a second round of sales banning as infection rates soared.
Covid-19 has introduced new themes to the market. Work-from-home sectors have seen almost no disruption in their activities and are even flourishing in the current environment. Other sectors will face a longer period of recovery . As lockdowns started in the East and moved to the West there was also a mismatch between supply and demand created for certain commodities. The exception to this was oil, where the shock to demand was not met by the same slower supply. Geo-political differences at Opec caused the June 2020 Oil futures contract to trade at a negative value right in the middle of the Covid-19 chaos.
We believe longer-term structural changes over the coming years are likely to be accelerated by the arrival of Covid-19 such as:deteriorating fiscal positions following stimulatory emergency policies could pave the way for increases in policies to improve revenues of governments across the world ;