Sectors that could do well in a coronavirus recession

So-called defensive sectors have traditionally helped investors weather recessions.

  • By Matt Whittaker,
  • U.S. News & World Report
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History offers some clues as to which sectors and industries tend to do well in a recession. But during the expected stock market downturn sparked by the COVID-19 outbreak, there may be some surprising recession-proof industries.

Investors typically turn to utilities, health care and consumer staples during economic downturns, says Craig Kirsner, president of Stuart Estate Planning Wealth Advisors. He believes these sectors will outperform the rest of the market during the coronavirus pandemic as well because people will always need electricity and water, medical services and food regardless of what the economy is doing.

The novelty of the economic hardship due to COVID-19 – in which millions of people have been ordered to stay at home and restaurants, bars, gyms and other spaces are shuttered indefinitely – means there may be some investments that are attractive today that might not have been in previous recessions.

“This is going to be very different,” says Victoria Fernandez, chief market strategist at Crossmark Global Investments. “This is a health crisis more than a financial crisis.”

Here are some sectors that could do well in a coronavirus-related recession:

  • Staples, discount and bulk retail.
  • Technology and remote work.
  • Utilities and telecommunications.

Consumer durables

During recessions, consumer staples companies such as Procter & Gamble Co. (PG) tend to do better than other types of stocks because they produce the goods that people need to stay fed and clean.

Hatem Dhiab, managing partner with Gerber Kawasaki Wealth & Investment Management, also points to discount store chains such as Dollar General Corp. (DG) because people are less likely to splurge on more expensive items when times are tight.

Similarly, club stores like Costco Wholesale Corp. (COST) and BJ’s Wholesale Club (BJ) could do well because of their combination of value and price for customers, says Carlos Castelán, managing director with the Navio Group, a consulting firm headquartered in Minneapolis.

“The survivors tend to be companies that provide strong value for customers either through lower prices and/or trusted brands which provide quality,” according to Castelán. As many nonessential businesses, such as clothing retailers, remain closed for the foreseeable future due to the spread of the virus, companies with a strong e-commerce presence will outperform their peers as more people order from home, he adds.

“Anything that you can order online reasonably, those products are going to do OK through this process,” says George Calhoun, director of the quantitative finance program at Stevens Institute of Technology.

Information technology

With stocks that are tied to the ups and downs in the business cycle, technology companies often fall out of favor during hard economic times. That dynamic could be different during the expected coronavirus recession.

Companies involved in software or 5G – as in "fifth generation" – cellular networks could make for good investments during the lockdown phase of a virus outbreak. Even after the pandemic has passed, as people and businesses shift their thinking more toward remote working, including video conferencing, these stocks could remain solid holds, Fernandez says.

Because of the stock market sell-off, some of these companies, which might have been too expensive before, can now be bought for relative bargains. Crossmark has been adding to its holdings of Apple (AAPL), Microsoft Corp. (MSFT) and Amazon (AMZN). It’s also made a new investment in cloud computing company ServiceNow (NOW).

Microsoft is positioned well with its Teams communication and collaboration platform as the coronavirus lockdowns are helping people see that they don’t need to have as many in-person meetings, Dhiab says.

Zoom Video Communications (ZM) is in a similar position; although, Dhiab adds that its stock is expensive. Despite recent security and privacy concerns, he sees the company sticking around as the remote work trend continues in coming years.

To round off the list of tech companies in an advantageous position today, don’t forget about entertainment, video game and online-streaming stocks. They stand to do well because of the increased demand from bored people holed up in their apartments amid social-distancing guidelines, business shutdowns and stay-at-home orders. Netflix (NFLX), for example, has already bounced back by more than 20% from its mid-March lows.

Utilities and telecommunications

Of course, the need for electricity to power homes and businesses means utilities enjoy stable demand. Utilities can also be solid investments during times of ultra-low interest rates, like we see now, because they tend to offer reliable dividend payments to investors searching for yield.

Crossmark has been buying shares of Vistra Energy Corp. (VST) in anticipation of the energy people will need during the coming summer months, Fernandez says, adding that the company has an attractive balance sheet and solid management. The company recently paid an annual dividend yield around 3%.

NextEra Energy (NEE) is a large holding at Gerber Kowasaki, Dhiab said. The utility recently was yielding 2.3% annually.

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