Published on March 26, 2021

Sectors to Watch Upon Vaccine Optimism
& Stimulus Checks

Many Americans have started to receive another round of stimulus payments of up to $1,400, and a large portion of those payments may be heading straight into the stock market. A recent Deutsche Bank survey found American investors between the ages of 18 and 54 plan to invest between 37% and 50% of their stimulus payments, respectively.

Sectors and companies that benefit from both an increase in revenue as we proceed toward a general reopening of the economy, as well as from an influx of retail investors' stimulus money, are the type of sectors to watch.

Cruise lines, airlines, hotel and casino operators, and travel and entertainment-booking companies may be the frontrunner sectors to watch, as these were among the most beaten down by the pandemic.

"With many of the most impacted industries like energy, airlines, hotels and banks still down well over 30% YTD, the upside to a positive vaccine outcome is considerable," UBS said. But some investors are cautious that a surge in profits during an economic recovery may not directly flow into a surge in stock prices if the company in question took on a lot of debt and equity dilution to remain solvent throughout the pandemic, as reported by UBS.

Sectors to Watch: Banking & FinTech

Sectors to Watch: Banking

Money-center banks are among the best recovery stocks, according to S&P Global Market Intelligence. That is because they act as a bet on both domestic and international growth trends, both of which are projected to come bouncing back as we progress in the pandemic recovery.

"While the low interest rate environment creates meaningful revenue headwinds in consumer banking, we believe Bank of America (NYSE: BAC) will be a leading beneficiary of the pandemic-driven acceleration toward digital banking and reiterate our Overweight rating," says Piper Sandler’s Jeffery Harte.

According to Mark Tepper, President and CEO of Strategic Wealth Partners, the “Robinhoodies” will invest their newfound wealth in Silvergate Capital (NYSE: SI) - a popular bank for innovative business and FinTech and cryptocurrency. Silvergate Capital, more like a tech company than a stodgy old bank, serves clients that other banks are hesitant to work with, such as Coinbase and Kraken. “With Silvergate, you’re getting a great company in a brand-new industry with a huge first-mover advantage. I think this thing’s got a long runway over the next few years,” Tepper said.

Sectors to Watch: Travel

Sectors to Watch: Travel

The travel market shut down almost completely in 2020, and Wall Street analyst Justin Post anticipates a major rebound in 2021 due to pent-up travel demand. After a year of being cooped up inside, travelers around the world are going stir-crazy. Investors can anticipate many Americans will use a portion of their stimulus payments to make summer travel plans, using online travel platforms like Expedia (NASDAQ: EXPE).

Despite the optimistic outlook, the airline industry still faces plenty of challenges in the near term. Bank of America analyst Andrew Didora says investors should prioritize airlines that have strong balance sheets and relatively high exposure to leisure travel rather than business travel. Southwest (NYSE: LUV) finished 2020 with more than $1 billion in net cash and is Didora's top pick among the "big four" U.S. airline stocks.

Sectors to Watch: Retail

Sectors to Watch: Retail

Analysts also expect that much of the stimulus payments will likely be spent on groceries and general consumer purchases. According to a recent article by Yahoo!Finance, with any rise in American consumer spending, Walmart (NYSE: WMT), Amazon (NASDAQ: AMZN) and Dollar General (NYSE: DG) could be expected to see an increase in purchases.

Compared to the overall 5.3% increase in Retail and Food Service for January 2021, Sporting Goods, Hobby and Music rose 8%; eCommerce jumped 11%; Furniture and Home Furnishings snapped 12% higher; Electronics and Appliances leaped almost 15% and Department Stores outpaced all categories with a 23.5% gain.

January 2021 Stimulus Pop

% Change m/m

5.3 8 11 12 14.7 23.5

Source: US Dept of Commerce

Countless small brick-and-mortar businesses were forced to shift to e-commerce overnight due to shutdown orders at the outset of the pandemic. Shopify (NYSE: SHOP) ushered in that transition for many with its host of products that allow merchants to set up digital storefronts. As of March 15, 2021, its shares are up by more than 140% (since February 24, 2020).

Sectors to Watch: Gaming

Sectors to Watch: Gaming

The gaming industry was heating up before the pandemic started and has established itself as one of the most profitable segments of entertainment, which includes the music and film industries. Now, the post-coronavirus world has more gamers who have joined because of the lockdown, and many are expected to remain consumers. For example, Logitech (NASDAQ: LOGI) is up 33.22% as of March 15th, 2021 (when compared with its closing share price on February 19, 2020).

These gains are due in part to surprise increases of 16.34% in EPS and 7.35% in revenue reported as part of the company’s latest earnings report. Another example is popular casual game developer Zynga (NASDAQ: ZNGA), which rose nearly 30% over the same period, due in part to its new partnership with Amazon aimed at offering content to Prime subscribers. Therefore, it is no surprise that gaming has also become a popular investment theme.

Sectors to Watch: Home Improvement

Sectors to Watch: Home

As the housing boom continues, Congress has pumped additional stimulus into the economy and mortgage interest rates remain near all-time lows. Companies like Home Depot (NYSE: HD), Floor and Decor (NYSE: FND) and Sherwin-Williams (NYSE: SHW) stand to benefit from a stimulated and reopening economy, as homeowners may feel compelled to renovate their homes in the hopes of snagging a higher sales price.

Sectors to Watch: Big Pharma

Sectors to Watch: Pharma

The extraordinary demand for Covid-19 vaccines and the record speed with which vaccine manufacturers have produced them has transformed the vaccine industry, and it expects to continue to generate significant profits as the pandemic continues.

Large pharmaceutical companies, particularly those involved in the vaccination program, namely Moderna (NASDAQ: MRNA), Pfizer (NYSE: PFE) and Johnson & Johnson (NYSE: JNJ), also stand to benefit under President Biden.

Moderna was tasked with producing booster shots of the vaccine for COVID-19 and since the beginning of November 2020, their share price has risen by 114% (as of close on March 15, 2021).

Sectors to Watch: Clean Energy, Solar & EV Makers

Sectors to Watch: Solar

Biden has signed executive orders on climate change and EVs and has hinted at a new approach to trade with China.

“With Biden re-entering the Paris Agreement, I expect we will see an uptick in net-zero 2050 announcements as US companies feel pressure to set a similar target,” said Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson.

“As a result, competition will increase for clean energy sector resources, including battery metals and renewables supply chains,” said Thompson. “Analysts believe that the solar industry will grow from its current valuation of $US53bn to $US223bn by 2026, as a repercussion of these changes,” said Gilbert of eToro.

How Hedge Funds are Responding

Equity markets took a significant tumble during the coronavirus crisis. Many global supply chains were brought to a halt and the series of virus-related market events took its toll on numerous companies. However, the crisis has also served as a catalyst for present and future economic growth. Institutional alternative investment managers are now studying the current market conditions, trying to locate the segments that will show sustainable growth.

Today’s markets, with higher stock return dispersion, lower stock correlation, and elevated market volatility make active strategies more attractive to investors, Credit Suisse said. This may be an adequate environment to consider allocating to institutional private equity and hedge funds that have a substantive risk management overlay. These managers have developed robust risk management frameworks, proven track records, and deep teams that are designed to navigate market volatility. Investors should be cautious when deciding on their next investment. However, the sectors mentioned above may be a good place to begin.

Participate in these recovery sectors by investing in institutional private equity and hedge funds.