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Coronavirus and stock markets – some things that caught our eye

We take a look at the companies and trends that have caught our share research team's attention during the crisis.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The first stage of the current crisis was defined by the dramatic collapse in stock markets and commodity prices. The speed of that decline would’ve made this crisis distinctive enough, but more recently the story has moved to a recovery that’s just as startling.

All investments carry risk, and it’s important to remember that share prices can fall as well as rise in value, and you could get back less than you invest. This article is not personal advice. If you’re not sure if an investment is right for you, please seek advice.

The recovery – significant optimism

William Ryder, Equity Analyst

The market recovery took a lot of us by surprise, especially as the economy has just suffered a record breaking shock. But recoveries always come as a surprise. If we all knew the market would rise tomorrow we’d all buy today and the market would rise today.

This makes stock markets inherently difficult to predict and explains why market timing is so hard to get right. If there was a fail safe way of timing markets we’d all do it and it wouldn’t work anymore. It’s partly why we think investing monthly is a good idea – as it removes the temptation to try and get too clever and forces us to be disciplined.

Global stock markets bottomed out on 23 March after suffering a sharp decline. In the 80 trading days ending 13 July the global stock market returned 41%, a little less than the same period ending on 30 June 2009 and more than the period ending 21 April 1987. This makes the recent rally one of the steepest on record.

Perhaps unfortunately the UK has been a bit of a laggard and only rose 27%. This underscores the importance of diversification as by holding a range of assets you stand a better chance of benefiting regardless of which market does well, though of course there are no guarantees.

It’s important to remember that the stock market isn’t a direct gauge on the health of an economy. Many of the large companies that dominate markets have been relatively unaffected, or in some cases strengthened, by the crisis. While a sustained global recession would hurt most companies, large or small, investors might be looking further out and predicting a strong economic recovery in the year or so ahead. If so, we hope they’re right.

Tesla – electrifying performance, but shocking challenges ahead

Nicholas Hyett, Equity Analyst

Tesla has been one of the big surprises of the coronavirus outbreak. Not so much for its admittedly impressive production and delivery performance, but for its stellar stock price performance.

Tesla’s shares have now risen 247% year-to-date, while the S&P 500 index of leading stocks is actually 1% lower than it was at the start of the year. You might expect that kind of performance from a small start-up achieving spectacular growth but Tesla’s now the world’s most valuable automotive manufacturer with a total enterprise value of $289bn.

An enterprise value takes into account both debt and equity and is a measure of the total value of a company’s assets. A company’s enterprise value is its market capitalisation plus its net outstanding debt.

Now we’re not arguing that Tesla isn’t a fantastic brand with a fantastic product. Or even that it hasn’t achieved some near miracles operationally in recent years – building an entirely new factory in China in less than a year. But however good the product, there’s a price at which you have to ask yourself whether it’s worth the cost.

A downturn in the economy isn’t usually the best time to be selling premium cars. Audi sales fell 12.7% in 2009 while Mercedes-Benz branded sales fell 13.4%. Now Tesla clearly has a tailwind from the increased interest in electric vehicles and its clear technological leadership in that area, so might escape similar falls. But that’s really the point – Tesla’s priced as a growth stock. Avoiding falls isn’t enough, in the long term Tesla needs to grow, and grow spectacularly.

Ford currently has a total enterprise value of $146bn, slightly more than a half of Tesla’s. Assuming Ford is a relatively efficiently run car manufacturer – and a valuation some way ahead of its rivals suggests the market thinks so – then a mature Tesla might ultimately be achieving similar profit margins and deserve a similar valuation.

If Tesla’s worth twice what Ford is, delivering the same margins at the same valuation, then you would expect it to be selling something in the order of twice the cars. That would mean Tesla selling something like 11m cars a year, compared to the 365,000 it produced in 2019. That kind of growth needs massive capital investment, and is likely to mean shareholders putting their hands in their pockets again in the future.

Tesla supporters would no doubt argue that the company will achieve higher margins than Ford, that its proposed self-driving taxi model will transform the entire industry or that its battery technology is exceptionally valuable. But whatever way you look at it Tesla has some serious hurdles to clear. We’re not sure those risks are accurately reflected in the share price.

See the latest Tesla factsheet

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Unilever – faring both better and worse than you might expect

Sophie Lund-Yates, Equity Analyst

On a given day, a third of the world’s population uses a Unilever product. Whether that be Dove deodorant or a tub of Ben & Jerry’s.

You’d be forgiven for thinking that producing staple products would hold the group in good stead in a pandemic – panic buying causes exceptional demand after all. However it’s not as simple as that.

A large part of Unilever’s sales rely on “out of home” eating, including catering and things like ice creams. So as lockdowns swept around the world, Unilever posted some rather lacklustre first quarter results. Underlying sales growth was flat. This comes as the group was struggling to propel meaningful growth in pre-pandemic days too.

We suspect the situation worsening was a spur to Unilever’s surprise announcement of plans to pursue a single listing on the London Stock Exchange last month. In theory a more flexible business structure should make rejuvenating the business through disposals easier.

However, we have been struck by how well Unilever’s supply chains held up. Unilever is responsible for providing products to a huge 25m retail outlets all over the world – a large number in emerging markets.

That means a global pandemic had the potential to seriously disrupt progress. The way border control was handled in individual states in India would’ve been vastly different to each other, let alone how goods were allowed to move in say Italy or Brazil.

There were rumblings that supply chains were creaking but ultimately they held up. And this is where Unilever’s key strength lies – its enormous scale. Being one of the biggest means it has resources and experience to throw at complicated logistical or operational conundrums. We suspect its importance to the global consumer market also means it will have had some bargaining chips to get things where they needed to be.

For us, coronavirus has highlighted the two sides of Unilever’s investment case. Its enormous scale should ultimately prop the group up – if it’s able to use its power and resources to boost agility sooner rather than later.

However, long-term sales growth is the ultimate question mark hanging over the group, and this has been made more challenging by current disruption. We worry meaningful growth could be some way off.

See the latest Unilever factsheet

Sign up for Unilever updates

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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