Normally it takes around three years to rebuild
The pandemic has taught us that the world can change unexpectedly. Even when everything seemed predictable, it became impossible to anticipate what would happen next. World markets were also affected by this unpredictable environment. However, to the surprise of many, the recovery came earlier than expected.
This Sunday commemorates the three-year anniversary of the record highs achieved by the European stock market, represented by the Stoxx 600, and in the US, by the S&P 500 and the Nasdaq 100, on February 19, 2020. However, from those levels, the stock markets experienced a precipitous decline as the Covid-19 virus began to spread, first in five regions of northern Italy, and then quickly throughout the rest of the continent.
The most severe market declines occurred in March of 2020. The European market indicator experienced a drop of 11.4% on March 12, preceded by a 7% decrease three days earlier. In the US, the S&P 500 saw its worst day on March 16, with a decline of around 12%. However, investors also remember the declines of 7.6% and 9.5% on March 9 and 12, respectively.
Looking back, the adage that the stock market climbs an escalator and descends an elevator proved to be inaccurate this time. Historically, when a stock falls into bearish territory (typically defined as a continuous decline of more than 20% from the highs), it usually takes around three years for it to recover.
Despite initial predictions that it could take up to three years for the stock market to recover from the COVID-19 pandemic, the US market surprised everyone by bouncing back in just six months. After plummeting 34% from February to March 2020, it made the fastest recovery in its history compared to previous crises.
The Stoxx 600, on the other hand, experienced a 35.5% drop from its peak to its lowest point this year and took a year to reach the 430 points it was trading at prior to February 19, which has become a black anniversary on the stock market calendars around the world.
Nearly three years after the Covidcrash, a sector-specific analysis shows that market value growth has been prevalent across all sectors. Looking at the largest companies by market capitalization in each sector from February 2020 to present, both Europe and the United States have seen growth in this regard. The banking and energy sectors show the highest percentage increase in both regions. However, the real estate sector has lagged behind, as it is the only sector in Europe that has not seen an increase in market value for at least half of its largest firms.
Initially, there was talk of a rapid and robust V-shaped economic recovery, but later it was suggested that the recovery would be somewhat slower and less robust, resembling a U shape before eventually taking off in a K-shaped trajectory. In other words, the recovery has been uneven, with a clear distinction between sectors, populations, and countries based on their ability to adapt and their starting point.
In April 2020, a McKinsey report predicted that the first sector to return to normalcy with the reopening of physical stores would be basic consumption, including food and pharmaceuticals, as their sales increased even during the lockdown. The report also set a timeline of between the second and third quarter of that year for the fashion and luxury sector to recover. Other winners were the telecommunications companies, with a high percentage of the population teleworking, and the utilities, with home consumption skyrocketing while factories returned to work.
On the stock market, the situation has played out differently than predicted, particularly considering the additional impacts of inflation and the February 2021 market conflict on top of the pandemic. The tourism industry, which was projected to remain in a slump until at least the second half of 2021, was placed on the opposite end of the spectrum in the report.
In terms of percentage growth, the listed companies on Wall Street have outperformed, with a higher proportion of US firms seeing an increase in their stock market value across all sectors except utilities.
Over the past few years, there have been significant changes in the capitalizations of different markets, with the US stock markets benefiting from the substantial weight that growth values, particularly in the technology sector, carry in their indices such as the S&P 500 and Nasdaq Composite. This was due to changes in consumer behavior and low interest rates, which led to increased valuations. According to Juan José Fernández-Figares, Director of the Link Securities analysis department, this trend was completely reversed in the second half of 2022 as these sectors were most affected by interest rate hikes.
As previously mentioned, the energy sector has seen the largest increase in market capitalization among the analyzed companies, with an average increase of 87% in the US and 80% in Europe. Following this, the banking sector has seen an increase of 80% in the US and 66% in Europe, and the pharmaceutical sector rounds out the top three with a rise in value of 72% on Wall Street and 52% in Europe.
According to the expert from Link Securities, the reasons for the better performance of companies in these industries are varied. In the case of the pharmaceutical sector, Fernández-Figares explains that these companies benefited from increased investor attention on new treatments and products after the pandemic. As for the US banking sector, he believes it was boosted by the recovery of its various businesses, such as retail and wholesale banking, business banking, mortgages, and others. Additionally, the rise in interest rates in the US, which started earlier than in Europe, also contributed to its success over the past year.
In conclusion, the European energy crisis served as a catalyst for the companies in the energy sector, according to Fernández-Figares. He notes that the crisis started before the conflict in Ukraine and was exacerbated by it, leading to American companies becoming one of the main suppliers of crude oil and, in particular, liquid natural gas (LNG).
Regarding the current prices of European markets compared to Wall Street, the Link Securities analyst believes that they are “too high and not sustainable.” Despite the significant increases in the stock markets of the Old Continent since the beginning of the year, they continue to offer discounts per PER (times the benefit is included in the share price) compared to their averages over the last decade and the last 20 years.
“The reversal of the trend and the recovery of the European stock markets and their capitalization in relation to Wall Street would not be surprising, as it has happened in recent months. Moreover, the greater exposure to China of multinational corporations could further consolidate this trend,” the expert explains.
Looking towards the future, Diego Morín, an IG analyst, recognizes that “the situation ahead of us in the coming months is quite complex.” The increased aggression of central banks is expected to bring about a long and deep recession, while debt could potentially lead to a collapse. Despite the better macro data in recent weeks, central banks have not yet shown any intention to ease up on the accelerator.
“A sector that could perform similarly could be the pharmaceutical sector due to its defensive status, while the banking sector may suffer more due to its dependence on the economic cycle. Energy companies could be affected by the drop in oil prices during an economic slowdown. Therefore, I don’t anticipate a bright future for these sectors because if a collapse does occur, we could see a significant correction across all sectors,” Morín explains.
In terms of the energy sector, Harbor Energy in the UK had the highest increase in market capitalization among European companies, while Marathon Oil Corporation had the highest increase in the US. The Irish bank Permanent tsb Group had the highest increase in capitalization in Europe, while in the US, First Horizon National Corporation had the largest increase, with a 168.7% rise in value.