Goldman Sachs says impact of coronavirus will be ‘limited,’ and these are the stocks to buy if it’s right

The market can’t make its mind up over the coronavirus. After closing at record levels last week, the three benchmark indexes slipped on Friday as optimism over the virus subsided. U.S. stocks climbed higher on Monday as investors worked out what to make of the latest developments.

Chinese officials reported 97 deaths on Sunday, a new daily record, diminishing hopes that the outbreak was stabilizing. However, a scientific model predicted the number of cases would peak in mid-to-late February.

Companies, economists, analysts and investors have been trying to count the cost of the full impact of the virus as it continues to spread.

In our call of the day, Goldman Sachs analysts said the economic impact will be limited and investors should look to cyclical and value stocks.

Goldman analysts said the virus would hit U.S. economic growth by up to 0.5 percentage points in the first quarter, but the drag would be recouped over the next two quarters and the global damage could be as low as 0.1 percentage points over the full year. “The impact of the lower global and U.S. economic activity on 2020 S&P 500 earnings per share will be limited,” they said.

“Investors who believe the economic consequences of the coronavirus will be limited should increase exposure to cyclicals and value stocks,” Goldman Sachs analysts, led by David Kostin, said in a note.

The bank’s sector-neutral dividend growth basket of 50 stocks has “declined sharply” alongside cyclicals and trades with depressed valuations.

“If fears of global pandemic are allayed, the basket should outperform,” they added.

The basket’s stocks set to outperform the most are semiconductor company Skyworks SWKS, +2.45% , IT services provider DXC DXC, -3.36% , hotel and casino operator Wynn Resorts WYNN, +0.76% , technology company Broadcom AVGO, -0.33% , and manufacturer of construction equipment Caterpillar CAT, +0.71% , the note said.

Goldman analysts said barring a “significant change” in circumstances, the impact of coronavirus on U.S. equities would be focused on a select group of companies most exposed to China — including restaurant owner Yum China YUMC, -0.70% and component manufacturer Qorvo QRVO, +0.19% . When it comes to sectors, airlines and gaming will be the most affected, due to travel restrictions and U.S. casinos operating in Macau — particularly as the Lunar New Year is the most lucrative time for gaming, it added.