Coronavirus impact: will e-commerce offset lower foot traffic?
In the luxury sector alone, share price falls of up to 35 per cent have created opportunities in a sector that was previously overvalued.
Social distancing, event cancellations and travel restrictions have decimated consumer confidence, with leisure, department store and apparel manufacturing stocks seeing some of the largest sell-offs. But share price falls bring opportunities, particularly for e-commerce retailers.
That's the conclusion drawn by Morningstar equity analysts in a new special report on how individual sectors are faring in the coronavirus induced market turmoil.
For luxury names, analysts believe the pandemic's impact will be severe but short-lived, with no material long-term implications. Price declines of 10 to 35 per cent have now created investment opportunities in a sector that was previously overvalued.
"We believe luxury industry revenue could decline in 2020 by some 6 per cent, with a more pronounced drop in the first two quarters of the year," analysts say.
"We expect demand to bounce back after the epidemic peaks with some pent-up demand from delayed spending, especially for seasonless items such as accessories, watches, or jewellery."
In the short-term, analysts expect first-quarter sales will be hit by China containment.
"Mainland China accounts for 10 -to 11 per cent of the luxury industry's revenue; and according to company commentary, between one third and one half of the stores in China were closed for around a month during the first quarter," analysts say.
But they expect China will be ahead in recovery, seeing stabilisation by the third quarter.
Year-to-date performance of industries
Source: Morningstar. Year-to-date as of March 19, 2020
On a global basis, Morningstar analysts anticipate demand to bounce back in the fourth quarter, but apparel will suffer more because of less pent-up demand.
"A consumer who didn't buy a winter coat in January is unlikely to purchase a winter coat in summer, versus accessories, jewellery, and watches, which are more likely delayed rather than omitted purchases (should personal incomes and wealth not experience lasting declines)," analysts say.
Retailing: e-commerce firms set to benefit
The question on everyone's mind is will the move to e-commerce, as house bound customers go online to buy, offset the fall in foot traffic? Outside of luxury retailing, analysts expect e-commerce to be the preferred channel and major firms to take share during the crisis.
In China especially, where the e-commerce sector has been faster penetration into lower-tier cities and rural area, analysts believe the impact of the virus is "more positive than negative" in the long term.
"Given the fear and discouragement of going out, this epidemic has led to more people in the lower-tier cities and rural areas trying online shopping, and people in all regions trying to shop for fast-moving consumer goods, groceries and fresh food," analysts say.
"In fact, in 2003, SARS helped give rise to ecommerce in China."
Retailers who have strengthened their ship-to-home capabilities should also be able cushion the negative impact of a decline in foot traffic, although not to the same extent.
Restaurants: under pressure
The restaurant industry has not been as fortunate as markets restrict dine-in services to curb the spread of the virus. In markets where take-away is still permitted, analysts expect severe guest count declines for at least the next two months and an uneven traffic recovery into the back half of 2020.
But while the sector faces a tough 2020 ahead, analysts believe the sell-off has created several investment opportunities. They have their eyes on firms that can be more aggressive on pricing, with advanced mobile-platforms and healthy balance sheets.
Morningstar's special report 'Coronavirus: Market Temperature Check; Don't rush to check-out; stock up on quality companies' highlights 10 stock picks for each of the four main regions that equity analysts cover: North America, Europe, Asia, and Australia and New Zealand, including names in retail - consumer cyclical.
The report also highlights Morningstar's base view on the long-term economic impact of COVID-19.
Morningstar Premium members can access the full report here.
Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.