It is already evident that the covid-19 pandemic could radically rewire the economic landscape for a long time. One way is through an enduring shift in capital and jobs away from industries more susceptible to such disruptions, a new VoxEU article by Marco Pagano of the University of Naples, and others, suggests.
Investors are shying away from stocks of companies that are less resilient to pandemic shocks, the authors say. Less resilient firms are those whose businesses require close contact with customers, and among employees, such as travel and tourism—unlike those that can adapt better to social-distancing norms.
Based on trends in the US stock markets, the authors show that the return currently required from ‘non-resilient stocks’ is much greater than what is required from ‘resilient stocks’. The required rate of return is the minimum return an investor will accept for owning a company’s stock as compensation for risk.
The authors find that between 24 February and 20 March, the price of stocks of both high-resilience and low-resilience firms dropped sharply, but the former depreciated far less, with the return differential ranging between 15% and 20%.
The start date was a day after Italy began its lockdown, and 20 March was the last trading day before the US Fed announced aggressive action to soften the blow of covid-19.
The authors argue that given the uncertainty, and the heightened awareness that similar disasters may occur in the future, investors are likely to keep pricing in pandemic exposure.
Citing stock options, too, which signal future prices, the article suggests that investors require significantly lower returns from more pandemic-resilient firms such as Apple, Google and Microsoft.
But the required return is higher for low-resilience stocks such as Marriott, United Airlines and Royal Caribbean.
Also read: Covid-19, asset prices, and the great reallocation