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Finding safe sectors, the choice narrows

David Stevenson, 30/03/2020

After the recent correlation across almost the entire Euro Stoxx 600 index, fund managers seeking a safe haven sector during the market downturn caused by COVID 19 looked increasingly hard. A recent analyst note compounds this notion further.

Investment bank Jefferies has released research suggesting that even online retailers may be impacted by the downturn, a segment of the sector that had previously been shielded by the overall decline in physical retail. However, analysts did suggest that issues are company specific with some potential winners remaining in the online distribution space.

The concern over online distribution’s ability to remain active during the recent lockdown was heightened when both physical and online retail giant Next decided to temporarily close its online and distribution operations. The company’s stores had been shut due to COVID 19, that was a given but a threat to its ability to continue selling online had investors spooked.

However, Jefferies’ analysts said in a note that they “take some assurance from ASOS’ and boohoo’s comments that the government has made it clear it wants online to remain open as a channel”.

One of the concerns raised by Next’s workers was their ability to continue to ensure ‘social distancing’, one of the key defences against COVID 19, while working in close proximity with peers in the company’s warehouses.

AIM-listed ASOS, on the junior market despite its market cap of over £1 billion, was quick to reassure investors that it would not be following Next’s decision. The company said in a statement: "We aren’t planning to close our warehouse. We’re confident in the procedures we have in place to allow effective social distancing.”

Fellow online retail giant boohoo concurred with their rival in a similar release, stating: “Our warehouses are continuing to operate and we are following all government guidelines.”

However, despite this reassurance of business as usual, ASOS’s share price has still plummeted by over 50 percent since 3 March, its larger peer boohoo faring slightly better with its share price being slashed by a third in the same time frame.

For investors and fund managers alike looking to play this black swan market, commentators have suggested that the traditional defensive sectors such as healthcare and consumer staples are where you should be positioned. As Amati fund manager David Stevenson said last week, discretionary spending is likely to be hit during this difficult time, therefore although online retail avoided the destruction that beset their physical counterparts, it’s probably not top of consumers’ lists of requirements.

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