The Corona Reversal

2021 starts with "head-fake" and moves to tech bust

Last year, we analyzed the divergent performance within the top German stocks depending on whether their businesses suffered or benefitted from the Corona-crisis. In the final part (hanseatichunter.com/post/the-corona-spread-part-3), we commented on the strong market rebound in H1’20 in which the “Corona-long” stocks were again able to outperform. Now finally, the tables have turned.

Surprisingly however, it took longer than expected. Normally, H2’20 was yet another period of outperformance for the Long-basket, while the Short-basket no longer underperformed. The latter had a strong rebound after the vaccine announcement in November’20. The beginning of this year initially brought more of the same, i.e. 2020 trends seemed to continue. This was true for the first three weeks only, upon which a dramatic reversal started. In a largely flat market since January 22nd, the Short-basket is up 12.2% versus -9.4% for the Long-basket, a spread of 22% in only 6 weeks.

The companies suffering from Corona measures have their stocks performing extremely well despite continued lockdowns. The best performers in the Short-basket in the last 6 weeks were Lufthansa and Thyssen.

So the reason for the drop of the Corona beneficiaries was not related to the lockdowns. Actually, nearly all of them delivered results better than analysts’ expectations and many reported on an even better start to the year 2021. No, the key reason was the sudden, strong rise in bond yields. As long as yields were ultra low (both 10- and 30-year US treasuries < 1%, most European gov’t bonds < 0%), long-term, uncertain cash flows of companies were valued very highly. Hence, the recent stock price fall was strongest for tech companies that derive most of their value from profits far in the future.

What does that mean going forward? We will leave the the difficult prediction of whether and when this new trend in bond rates reverses to the market gurus. As stockpickers, we are more interested in analyzing which businesses will keep the good momentum or develop new momentum and which ones will decelerate or even decline. For example, within the online retail space, we believe the leading German online pharmacy, Shop-Apotheke, has a good chance of keeping their high growth rates as consumers have become used to the convenience of not having to leave home. While buying health care products is a chore, shopping for clothes or home furnishings can generally be considered a pleasure. Therefore, we would expect companies such as Zalando or Home24 to not be able to sustain their stellar growth rates. Hellofresh and Delivery Hero will obviously be more challenged once restaurants reopen.

The HanseaticHunter

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