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Ten Months On, The “Covid Recovery Trade” Keeps On Giving

Raphael Fiorentino
20th January 2021 - 4 min read

Our index of North American recovery stocks is up 100% relative to the S&P 500 (see chart below) since markets troughed at the end of March, and that of European stocks is up 50% relative to the Eurostoxx 600. They also each outperformed our traditional “long research candidates” indices by 60% and 30% respectively.


As detailed in our white paper, recovery scores are:

  1. Only assigned to the 15% poorest performing stocks in each region over the previous year
  2. Best played when expectations of global growth (iGDP) trough

Back in April, our note “All the world needs is a Fed meeting” reported on an emerging recovery trade for equities, triggered by staggering money injection programs by the Fed at specific points (e.g. primary dealers, corporate credit issuers) that were likely to create a bid for risk assets like equities and favour early participants (close to the money injection points) as they get to spend their dollars before subsequent price increases (caused by more money chasing the same amount of goods). This phenomenon was described 300 years ago by Richard Cantillon who very profitably exploited it when he bought into John Law’s fledgling Mississippi Company in 1717 and sold right before the end of its bubble in 1720.

Extract from Butterwire’s White Paper: “The best recovery scores consist of stocks with high overall fundamental scores (S) but low Fitness (F) and Momentum (M) scores”.


Just like the recovery of 2016 described above, 93% of North American recovery stocks as of 31 March 2020 managed to outperform the S&P 500 by an average of 64% by 15 January 2021 (“only” 74% and 27% respectively for their EU counterparts).

What is unusual this time is that recovery stocks not only got another boost in November (see table below), but that the recovery rally kept going as the Democrats seized control of the White House and both Houses of Congress. Indeed, 95% of the North American recovery stocks as of 31 October 2020 outperformed the S&P 500 by an average of 35% (similar pattern in Europe with 92% hit rate and 31% average outperformance)!

Constituents of the North America recovery stock index as of 31 March and as of 31 October, as well as excess return to 15/1/2021 (index inclusion criteria = size XL, L or M and recovery score of at least 2 out of 10)


Possible contributors to this renewed boost to recovery stocks:

  • Global macro indicators pointing toward strong “reflation” expectations (see the first and third dials below, with extremely high global growth expectations and fast rising inflation/price instability expectations). Such macro context favours “upstream” sectors as initially flagged in a note last June (“Recovery, Upcycle, EM, Commodities Next?”) and both the March and October recovery index constituents were dominated by Energy/Commodity equities.


  • Much relative upside left for commodities after 9 years in the doldrums and a recent recoupling with equities (see chart below).


  • The election of a new US President which has historically correlated with a November-December rally of value stocks (recovery stocks certainly belong to the category of value stocks), the disproportionately negative impact of expected tax rises and regulatory scrutiny by the Biden Administration on “privileged” sectors like technology, media and healthcare over “distressed” ones like energy and real estate.
  • Pfizer’s covid-19 vaccine announcement on 9 November, the first of many in the pipeline, creating some hope that we will stop destroying the spirit and livelihood of our population because 1% of us with one year of life expectancy are at risk of dying prematurely from a specific viral infection.
  • Ever stricter, more economically crippling measures recently introduced in the West necessarily results in bigger Government and larger stimuli and currency debasing in the US and Europe (vs. China and vs. real assets), which in turn sustains the bid for risk assets (including the growth of RobinHood accounts and uninformed investing). In other words, bad news (for Main St) means good news (for Wall St).

Does this mean then that green strategies have been (and will remain liable to) underperforming? We do not think so. As a first illustration, the European Climate Transition Index produced for Climate Transition Analytics (CTA) has been outperforming the Eurostoxx 600 index throughout 2020 (see below).


A second illustration looks at the distribution of returns amongst the EU recovery stocks of last March, which shows similar hit rates and average returns amongst stocks with relatively high exposure to Climate Transition Risks (red box below, consisting of stocks with an average Value at Risk from Climate Transition of -20% per CTA) and stocks with relatively low such exposure (green box below, average VaR of 0%).


Unsurprisingly then, stock selection remains the primary driver of any investment mandate’s success as it can overcome any apparent drawback from specific portfolio constraints, whether style (e.g. value), screen (e.g. ESG), or region (e.g. Eurozone).