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Georgia, Oklahoma and South Carolina have begun reopening beaches, retail stores, barbershops and salons after lengthy stay-at-home orders brought economic activity to a grinding halt. Other states are set to follow.
“The path to recovery is extremely uncertain and likely to be uneven,” wrote Arjun Menon, vice president of U.S. equity strategy at Goldman Sachs. “For equity investors, this means that many ‘winners’ and ‘losers’ will likely be determined by the ability of businesses to reopen and by the speed of consumer demand normalization.”
Economists at Goldman Sachs combed through the data around the reopening of other countries and found timelines are often too optimistic and the process is gradual. The reopening of manufacturing and construction is typically easier than that of consumer services.
As President Trump’s plan for “Opening Up America Again” begins to take hold, Goldman says investors should follow a simple three-part plan to reap the rewards of the U.S. economy getting back to normal.
- Avoid exposure to small business
- Buy quality companies at a reasonable price
- Buy cyclical companies that produce goods
“Conceptually, these represent a barbell strategy of owning cyclical stocks that will benefit from the initial reopening of the economy and defensive stocks that are most insulated from liquidity and default risks while avoiding the firms most vulnerable to prolonged gradual reopening,” Menon wrote.
Small businesses have been among the hardest hit by the prolonged shutdown of the U.S. economy, with half of 10,000 surveyed by Goldman having the financial strength to last just three months or less if the stay-at-home orders persist.
Last week, Congress replenished its small-business relief fund with an additional $484 billion, but Goldman says the default risk within the space remains high. Even with the additional aid, Goldman says investors should avoid companies that derive the lion’s share of their revenue from small business.
Instead, Goldman thinks investors should look at companies with strong balance sheets that are trading at reasonable valuations to insulate portfolios from the risk of both downgrade and default. The firm says investors should be wary of stocks that have already seen their valuations surge and “value traps” that are cheap for a reason.
As the economic rebound takes hold, cyclicals, or those most sensitive to changes in economic conditions, generally outperform.
Goldman says the economic recovery in China showed that manufacturing and construction activity should come back first, meaning goods-production cyclicals are set to benefit most. Caution from the consumer, at least initially, puts shares of business-facing companies in position to outperform.
The firm also thinks investors should avoid names with direct-to-consumer models, exposure to the volatility in oil prices and a high inventory to sales ratio.