Opportunities amid equity market dislocation

Erin Xie, PhD| Jeff Shen, PhD| Mike Pyle| Tony Kim |Apr 22, 2020

As equity markets have started to recover from their March lows, many investors are wondering when to rebalance their portfolios, how the coronavirus has affected the long-term outlook and where new opportunities may be arising.

On our recent Market Pulse Call, Mike Pyle, Global Chief Investment Strategist for the BlackRock Investment Institute, discussed these questions with Jeff Shen, Co-CIO of Active Equity and Co-Head of Systematic Active Equity; Erin Xie, Active Equity Portfolio Manager and Head of Health Sciences; and Tony Kim, Active Equity Portfolio Manager and Head of Science and Technology. The group shared views on where markets are with regard to recovering from the coronavirus shock, insights from China’s experience battling the outbreak, and how the pandemic is reshaping the landscape within healthcare and technology.

Highlights of their discussion follow.

Our polling results show that nearly half of investors are awaiting signs of market stabilization before buying equities, what signals are you watching to indicate when markets may turn?

We think markets will go through three phases. Phase one is a freefall, which is what we saw in the U.S. in March. Phase two, where we think the market is now, is a bottom-seeking phase, and eventually we’ll hit phase three: a fundamentally driven recovery.

During the global financial crisis, one thing we learned from our text-mining analysis was that there was a peak in investor attention on the crisis in November 2008, but that markets didn’t bottom until April or May of 2009. We think that we’re currently seeing a similar peak in investor attention about the coronavirus, and that’s a metric that we’ll continue to track closely.

I’d also note that we currently see a huge amount of dispersion in country returns, and that much of that can be traced to differences in public health and government policy responses. Because of that, country is becoming much more important as a unit of analysis, so we don’t think investors should be looking for a single, global inflection point.  The recovery is likely to be staggered across countries. For example, China, despite being the epicenter of the crisis, has outperformed most global equity markets this year.

Speaking of China, what can we learn from its experience about what normalization may look like as we exit the acute phase of this crisis?

We think the overarching theme is that alternative data can be extraordinarily helpful in terms of providing a timely read on economic activity, when the information coming from companies and governments is severely lagging the nature of the crisis.

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Alternative data can be extraordinarily helpful in terms of providing a timely read on economic activity.

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Looking at China, many of the alternative data sources we track—from satellite images to traffic patterns to internet searches—point to a very uneven recovery. Using the traffic example, we see some cities have returned to 80-90% of their pre-crisis congestion, while others are only at 40%. Extrapolating this pattern to the rest of the world, we believe that recovery is likely to be staggered and uneven across cities, states and nations.

Another thing we’ve seen in China is that the supply side has been quicker to recover than the demand side. While satellite images and GPS data show that factories are coming back online, credit card transactions and internet search patterns indicate that demand in many areas is still lackluster. As we think about what that means for the U.S. and other developed markets, where the economies are more service-oriented and consumer-driven, we think those economies will recover a bit more slowly. A V-shaped recovery is possible, but not likely.

Our polling results also show that most respondents view healthcare and technology as the sectors offering the biggest long-term opportunity. How is the pandemic reshaping health sciences?

The world is experiencing a health crisis, and we think it is very likely that it will be the healthcare industry that will take the world out of this pandemic. The response so far has been encouraging—there are more than 70 vaccine programs in development. And there are even more programs that are working on diagnostics and therapeutics, to improve outcomes for the infected population. The industry is trying to attack the virus from all different angles.

Our current view is that the antibody approach is among the most promising technologies. We already have some successful examples of this application in battling viruses—for example, with the Ebolavirus. This is an important area that we will continually monitor and evaluate in the coming months.

Ultimately, we think therapeutics and vaccines will co-exist, partially because vaccines, while very effective, do not typically provide full protection for elderly people and those with underlying diseases, who make up the most vulnerable population for Covid-19. So, companies with strong diagnostic capabilities, as well as, obviously, those that end up developing effective therapies and vaccines, may both help alleviate the crisis and potentially reward investors.

We also think that the pandemic is accelerating some structural trends within healthcare, notably the rise of telemedicine and homecare, and these changes are likely to become permanent.

What about technology, how is Covid-19 shifting the opportunity set?

A few things come to mind. One is the increased interest we’re seeing in re-wiring the supply chain. The idea of localizing supply chains in the U.S. was already gaining some traction as a result of increased tensions with China. But when we saw the difficulty that some states were having in obtaining ventilators and other key medical supplies, the supply-chain question suddenly became top of mind for many people and industries.

Another, which represents an even more profound shift, is the rise of artificial intelligence (AI) computing. AI has obviously been ascendant for some time, but as we attempt to leverage genomics to help solve this crisis, we’re facing absolutely immense computational challenges, both in terms of software and silicon. So, we think that the next generation of computing around what we’d call AI silicon and AI software is going to be hugely important and that there are a lot of interesting companies that are applying themselves here.

Finally, we’d add that the unprecedented shift to working, learning and consuming at home—some of which is likely to be permanent—is exponentially increasing the importance of cloud security and software modernization.

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As we attempt to leverage genomics to help solve this crisis, we’re facing absolutely immense computational challenges.

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Mike Pyle
Global Chief Investment Strategist
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Jeff Shen
Co-CIO of Active Equity and Co-Head of Systematic Active Equity
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Erin Xie
Active Equity Portfolio Manager and Head of Health Sciences
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Tony Kim
Active Equity Portfolio Manager and Head of Science and Technology
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