Knowledge. Shared Blog

June 2020

What a Return to “Normal” Could Mean for Equities

Market volatility continues as some recently reopened areas of the U.S. and other countries experience a spike in new coronavirus cases. In our ongoing video series on COVID-19, Portfolio Manager and Research Analyst Dan Lyons and Director of Research Matt Peron discuss the current state of the pandemic and what investors should consider as the economy tries to return to “normal.”

Key Takeaways

  • As global economies begin to reopen and progress is made on a COVID-19 vaccine, the question arises of when we can expect see a return to “normal,” especially amid rising case numbers in some areas.
  • From an investment perspective, we see opportunity in those companies that are temporarily dislocated as a result of the pandemic but have the potential to emerge from the crisis with their business models intact.
  • For many companies, we are cautiously optimistic that the long-term fundamental damage may not end up being as severe as originally feared. However, the impacts of COVID-19 will likely vary widely depending on the industry.
View Transcript

Michael McNurney: Hello, and welcome to Janus Henderson’s ongoing series on the COVID crisis. My name is Michael McNurney, and today I am joined by a familiar face to those who have watched this video series, Dr. Dan Lyons, who has a Ph.D. in immunology from Stanford University. Dan is our resident expert and biotechnology analyst here at Janus Henderson. And also joining me today is a new face to this series. We have Matt Peron, who is our new Director of Research here at Janus Henderson, to give us insights on the broader economy and the way that Janus Henderson sees all of the companies that are affected by this particular virus.

Dan, I would like to start with you. We have seen a resurgence of COVID in some areas that have reopened recently. Is a second spike a foregone conclusion for places that have perhaps opened too soon?

Dan Lyons: Right now, there is roughly two million total positive cases in the U.S., and we are seeing in some parts of the country, like in Arizona and Texas, we are seeing a bit of a spike in new cases. Other parts of the country that were hard-hit before – like New York, New Jersey – cases actually peaked and are now coming down. And so, we are seeing kind of a split between regions across the country, and it is worrisome that we are starting to see higher rates of new cases in some of these states that opened relatively early.

On a global basis, we are seeing some countries around the world that still are in the exponential phase of growth, places like in South America; like in Brazil, for example. And we are also seeing in some countries, like Iran, that reopened, a big spike in cases. And that is definitely something that we want to avoid here in the U.S.

McNurney: Dan, the biopharma industry continues to seek a vaccine or a therapy at a very impressive pace. What is the latest on the efforts in trying to treat the disease?

Lyons: Yeah, there has been a ton of progress. So first off, you know, we are seeing companies putting therapeutic antibodies into the clinic, which I think is one of the most promising ways of treating an active infection and also potentially preventing it. And I expect there to be clinical data from these in the fall.

However, for the long term, we need something beyond treatments and here, vaccines are the answer. And I am really optimistic that we are going to ultimately get a vaccine. We have five different modalities in development across many different, over 100 different companies. And we are already starting to see positive clinical data from these programs, and several of them are moving into the last stage of clinical development – Phase 3 clinical trials – over the summer in July.

McNurney: Matt, I want to turn to you. Do we need a vaccine in order to get back to “normal” in terms of the economy and then the marketplace? Or can we get there before that actually occurs?

Matt Peron: I think it depends what you define as normal. I think we will get to the “new normal” over due time, and we are starting to see that unfold now both in actual activity, mobility data, etc. We are also seeing it in the market, and that is a bit of what is behind the market recovery that we have seen over the past few weeks, is some hope that we will get to some level of normal – somewhere between the old normal and the depths where we had to shelter-in-place orders.

McNurney: So maybe talk about some of what the new normal looks like and who are the winners and the losers in that environment.

Peron: I make two takeaways, Mike. First is that you are seeing a differentiation in the winners and the losers but there is a further differentiation, and one are the temporary losers. And we see some [companies] that are temporarily dislocated, but yet our analysts are doing the work and [believe] their business models will still be intact on the other side. And in those companies, we see opportunity.

I think the other major takeaway that we are seeing so far – and it is early days yet – but as we sat in the depth of the crisis in late March and early April, many of us were drawing up doomsday scenarios both in terms of the severity of this crisis as well as the duration of the crisis. And what we are seeing is those doomsday scenarios, by and large, haven’t been playing out. So a cautiously optimistic take from us – and again I am making a broad generalization, it is going to be very different by industry – but cautiously optimistic [that] some of the worst cases in terms of lasting fundamental damage to many companies won’t be as bad as was possibly feared a few months ago.

McNurney: Matt, have companies largely gotten a pass on the first quarter in terms of revenues and earnings?

Peron: In general, the market has been looking past certainly the first quarter and the second quarter, even, and looking more to assess what are the prospects for 2021, and just the sense of that path back to a recovery. So that is really why the market is so volatile now. When there are data points to suggest [the] recovery [will] move faster, then the market will move up; and when there are data points that suggest that we will run into trouble, then the market pulls back.

McNurney: Matt, as we see a return to fundamentals, I would imagine we will see a breakdown in the correlation among stocks.

Peron: Typically, when we see these types of bear markets, you typically will see the macroeconomic influence on stocks and sectors really drive the market. And we saw that to an extreme. Actually, we saw that to a level we have never seen before by our measure. So that is to say that stocks were really keying off of the macroeconomic data. As we get into recovery, we would expect to see that broaden out and other factors, such as fundamentals by the company level or the industry level, start to drive the stocks. And to your point, Mike, it provides opportunities for our analysts to really do their work and find out who is going to come out okay, better or worse on the other side of this. And so that would provide a lot of opportunities and that is really where we are focused on our research at the moment.

McNurney: Gentlemen, thank you very much for your time. We truly do appreciate it, and we appreciate all our viewers here at Janus Henderson. Thank you very much.

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