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How Could Coronavirus Affect the Stock Markets

On December 31st, 2019, a group of 41 individuals in China was recognized as having a mysterious form of pneumonia; this would later (on 7th January 2020) be identified as a new strand of Coronavirus named COVID-19. Just a few days later, in Thailand, the first case outside of China would be declared. By January 30th the World Health Organization had officially announced a global public health emergency. No one had expected that within a few weeks this virus would end up spreading throughout the entire world, creating a pandemic, thereby exploiting the weaknesses in the health care systems in countries such as Iran, Italy, Spain, and the US. By March, several countries had put their populations on lockdown and placed international travel restrictions. As of today, the virus has infected nearly a million individuals, with over 50,000 deaths worldwide.

COVID-19, whose spread has been gravely underestimated by world leaders, has caused severe damage, not just to individuals but also entire economies, triggering a global recession within the first few weeks of its existence. Daily business life has been disrupted, workers have been laid off en masse, leading to an increase in unemployment rates, and travel has been severely limited worldwide. The global stock market has taken a nosedive, with the NASDAQ and the S&P 500 index dropping approximately 20% year-to-date, while the DAX and FTSE 100 index dipped by almost 30% year-to-date. Despite these severe drops in stock market values, certain industries have been positively impacted and seem to be thriving during this pandemic, while others have suffered greater than the general market. Here we provide examples of industries both positively and negatively affected industries by the pandemic and discuss the reasoning behind them.

Negatively Impacted

These companies have been underperforming in the overall stock market.

1. Cruise and Casino Industry

On February 4th, 2020, the “Diamond Princess” cruise ship, owned by Carnival Corporation & plc, was quarantined in the port of Yokohama, Japan, with its 3711 passengers onboard due to several travelers testing positive for COVID-19. This incident was followed by the “Grand Princess” cruise ship, also owned by the corporation mentioned above, being quarantined off the shores of San Francisco. Consequently, in order to reduce the spread of COVID-19, several companies decided to suspend their cruise line operations. This, in turn, has led to cruise line stocks getting hit the hardest, with stocks like Carnival Corporation & plc, CCL, losing almost 80% of its value since its all-time high in mid-January, reaching a low not seen since 1997. Another cruise stock, Royal Caribbean Cruises Ltd., RCL, has also lost almost 80% of its value, trading at $27 from its all-time high of $135; last time such prices were observed for this stock was back in 2013. Similarly, the Norwegian Cruise Line Holdings Ltd., NCLH, lost approximately 85% of its value from its all-time high at $60, now trading at record lows. Although dividend payouts by the companies, as mentioned earlier, might look tempting, there is a high probability that dividends will be reduced due to the crashing revenues.

Casino operators present in locations such as Los Angeles and Macao, China, were amongst the first to be shut down in order to prevent the spread of the COVID-19 virus. Stocks such as MGM Resorts International, MGM, have fallen by approximately 65%, due to the closure of several resorts. A similar scene was observed for Wynn Resorts Ltd, WYNN, which has also dropped by around 60%.

When it comes to the cruise stocks, although short-term stocks might get hit pretty hard, there is always hope, in the long run, that these stocks rebound. However, this rebound will be slow, seeing as even when the lockdown ends, the high layoff of workers (causing a spike in unemployment) will definitely reduce demand because people will naturally prioritize necessities (food and shelter) over frivolous expenditure such as leisure and vacation. Furthermore, the recent 2 trillion dollar stimulus package signed by President Donald Trump did not include the cruise ship industry. That said, in the long run, as observed by statista.com, from 2007 to 2019, the number of cruise passengers carried worldwide has been steadily increasing. As such, the net income of most of these companies throughout the previous years has always been positive — which explains them paying out dividends. It is also worth noting that these companies have debts towards big banks. Thus, the question arises: would banks loan to such profitable businesses during hard times, or will they allow this industry to sink and lose all their loans?
Casino stocks will most probably suffer a similar fate as economies around the world enter a recession and are experiencing pandemic-induced unemployment hikes. Similarly, the demand for such activities decreased due to more essential requirements, even though Macao’s casinos are still currently open. One merely needs to look back into the charts of the 2008 financial crisis to see how these stocks had faced similar crashes.

2. Airline and Booking Industry

Among the first industries to be affected by the pandemic were airline industries. One can take a look at the past decade to see just how several players in this sector were already struggling, with companies like Thomas Cook and Air Berlin going out of business. Furthermore, the green movement and improved infrastructure for the rail industry did put a lot of pressure on the aviation industry to try and lower prices even more. Currently, the recent pandemic has added even further damage as flights get canceled all over the world. The stocks of companies such as Deutsche Lufthansa AG, LHA, Delta Air Lines Inc., DAL, Southwest Airlines co., LUV and American Airlines Group Inc. have gone down an average of 50% year-to-date. There is a high probability that governments will have to step in, in order to help this ailing industry. On the other hand, plummeting oil prices are helping mitigate the damage caused.

Another sector that was heavily affected in the early stages of the pandemic is the booking industry. These include Booking Holdings Inc., BKNG, which comprises platforms such as Agoda, Priceline, and the famous booking.com, as well as Expedia Group Inc. which includes sites like Hotels.com, Trivago, and Expedia.com. Due to the tourism industry being affected by international travel bans, the stocks of BKNG and EXPE have fallen by approximately 40% and 50%, respectively.

3. Automaker Industry

Yet another industry that is currently being hit hard by the COVID-19 pandemic is the automaking industry. The majority of its companies were already facing a difficult time, with the recent decrease in the number of vehicles sold worldwide yearly, the green energy movement, and the appearance of a new revolutionary company, capturing a large portion of the market, namely Tesla, TSLA. To add further injury to the damage, the current outbreak is plunging the world into a recession, or depression as some people have suggested.

Now, there are several reasons why this pandemic is disrupting the auto industry. One is the increase in the number of people applying for unemployment benefits; this number has increased this quarter to 3.3 million in the United States alone, compared to the average of 350,000 in the last 50 years. Secondly, even steadily employed workers are showing concern about their job security, thus encouraging many to save as much as possible for emergency situations rather than buy a car. Lastly, given that several car parts are made in or imported directly from China, in light of the ongoing lockdown, and though they are slowly returning to normal business operations, there have been critical disruptions in the supply chain process.

As such, we can see that the stock of companies such as Fiat Chrysler Automobiles, FCA, Ford Motor Co., F, and Daimler AG, DAI, have dropped nearly 50% year-to-date, while Bayerische Motoren Werke AG, BMW, and Volkswagen AG, VOW have dipped by almost 40% year-to-date. Exceptions to this rule include the stocks of exotic cars, such as Ferrari N.V., RACE, which has only decreased by 10% year-to-date, since these cars are considered a value investment, much like gold.

Positively Impacted

1. Pharmaceutical Industry

As we have all picked up from news headlines and a number of Twitter accounts, there is currently a race between the pharma and biotech industries to find a vaccine or treatment for the COVID-19 virus. After all, due to the virus’s high infection rate, there are potentially billions to be made here by such companies. Although a treatment would help reduce the number of deaths, there is much doubt about whether it will successfully curb the infection rate because this virus does not require an individual to experience clinical symptoms in order to contaminate others; even asymptomatic people can infect people in their surroundings. Furthermore, its ease of spread via air droplets making it that much harder to control. Thus, in order to reduce infection rates, perhaps even eradicate the virus entirely, a vaccine would certainly be the most effective solution.

Unlike the previous examples of negatively impacted industries, pharmaceutical and biotechnology companies who work on vaccines and drugs for the treatment of COVID-19 seem to be faring better. One major player in this hunt, the biotechnology firm Moderna, is currently undergoing a phase 1 trial for its RNA-based COVID-19 vaccine. The stock of Moderna Inc, MRNA, is currently trading at $29, almost 60% up year-to-date. Another biotech company currently in the preclinical stage of its DNA-based vaccine is Inovio Pharmaceuticals Inc., INO, whose stock has gained a whopping 133% year-to-date. A third company by the name of BioNTech SE, BNTX, also in the preclinical development stage of a vaccine with the help of Pfizer Inc., PFE, has experienced a 40% increase in stock value.

Although these small market cap companies currently working on COVID- 19 vaccines and treatments seem to be doing rather well, in the long run, their stocks will suffer a similar fate; they are too volatile, which will invariably cause their growth to drop back down into the single digits. In addition, you would not want to enter into a speculation game where you try to guess which company will discover the vaccine first — afterward, the rest of the companies will see their stocks return to normal pre-pandemic values.

Accordingly, it would be more advisable to focus on the stocks of larger market cap pharmaceutical firms. As a matter of fact, these have been trading in the stock market for far longer than newer companies, are more diversified in the market, and sell a variety of other products. Johnson and Johnson, JNJ is an example of this. In addition, they pay dividends, which means that even if their stocks decrease in value, you would still make money. Lastly, and despite those large companies performing worse year-to-date, they are surpassing the general market.

2. Online Communication and Streaming Services

A number of developed countries have placed their citizens on lockdown. This has encouraged businesses, schools, and even individual users to look for platforms to interact with each other in order to minimize the disruption, created by this current pandemic. One of these platforms is a remote conferencing service called Zoom; the stock of Zoom Video Conference Inc., ZM, has in fact gone up year-to-date by almost 90%. However, one must remember that this business had just recently launched its initial public offering (IPO), which begs the question: will its stock remain at such high prices after the pandemic is eventually over?

Another major industry that has largely benefited from this pandemic are streaming service companies. The most famous of which is Netflix Inc., NFLX, which has seen its stock jump by 15% year-to-date. That said, not every company that provides streaming services will increase in value. For instance, Walt Disney, DIS, which provides the streaming service Disney+, is not likely to experience any growth due to the closure of a majority of its parks, causing its stock market value to drop.

Conclusion

The COVID-19 pandemic has wreaked havoc to the economy, with certain industries, especially in the traveling and tourism sectors, being hit harder than the rest of the market. However, even though it looks all doom and gloom for the global market, certain industries are definitely riding the wave. It remains unknown how long this lockdown will last, although with current infection numbers, especially in the US, there is little hope that it will be lifted before May 2020. The earning reports of large companies will be announced soon, and countries will start publishing their official GDP and unemployment figures. This will provide us with a clearer picture of the current financial situation. With all this said, it is important to remember that this is not the first time stock markets have experienced such large drops, neither is it a first for the world economy to enter into a recession. In the end, markets always prove their ability to recover from severe hardships.