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Diamond in a virus crown

11 may 2020

One of the limelight topics discussed these days is the speed of market recovery after the COVID-19 pandemic will fade away. Will there be a quick return to the previous level (a V-type recovery), will the process be slow (U-type), or will we have a long recession (L-type). From our part, we will also try and contribute to this fascinating discussion.

Here is a three-month stock price chart for Johnson & Johnson (NYSE: JNJ), the world’s leader in the pharmaceutical market. After a terrible drawdown in March, the J&J stock price almost returned to the February highs. That’s what is called a classic V-type recovery. 


And this is how the stock price chart of Signet Jewelers Ltd (NYSE: SIG), the world's largest diamond jewelry retailer, looks like in the comparable period. Are there any doubts that we have the “L” letter here? 


It remains to add that stock market analysts have a favorable outlook on pharmacists’ shares - their recommendation is “Buy”, but neither traders nor investment bank analysts have any confidence in diamonds, as their recommendation is “Sell.” And the speculative spikes of quotes, even such extreme ones as happened on Friday 05.08.2020, do not change the overall picture - there are no fundamental reasons for growth.

I foresee the sarcastic grin of a worldly reader - pharmaceuticals and jewelry retail are completely different markets, they do not intersect at all, and the author tries to compare the warm with the soft. Of course, pharmacists, as they say, caught a hype in the wake of global coronavirus hysteria, and today nobody cares about diamonds. This is today, but tomorrow China will recover, the quarantine in the United States will be lifted, the Indians will reboot... And everything will return to normal, people will again need diamonds, everything will be fine.

It won’t.

In fact, pharmaceuticals and jewelry retail intersect, and in a very narrow spot - in the consumer’s wallet. Industry analysts traditionally complain that every year more and more manufacturers of other luxury goods and gadgets, as well tour operators bite off from the “diamond cake”... But now we hear a powerful crunch produced by the jaws of a completely different eater, whose unparalleled appetite has a qualitatively different basis.

It is difficult to formulate the quintessence of a diamond better than Martin Rapaport does: “For many young women, the diamond dream is that one day she will fall in love. The perfect man will come along, ask her to marry him and give her a diamond ring to seal that love. The dream starts at a young age — maybe 10 or 12 — and continues throughout her life. Even after she gets married, she will look at the ring every day, remembering the love it represents." This touching anthem to love, family and marriage is a classic information wrapper in which a piece of crystalline carbon is packed before being sold to a consumer. It worked great in the baby boom years, the best years for the diamond market, when the ingenious slogan, "A diamond is forever!" came to life and when by the way Signet Jewelers Ltd. was born. To build a product promotion strategy on the instinct of procreation is the right and unerring decision. But this “basic” instinct is not the only one.

After the First World War, psychoanalysts were forced to substantially correct their ideas about the structure and mechanisms of the human psyche. Former frequenters of cozy Viennese coffee houses were returning from the front lines (those who were lucky) being completely different people: the Oedipus complex appeared to be of less concern when ten-inch shells exploded near your trench. And this brought Thanatos in addition to Eros in theoretical writings. Quite a working analogy of the current situation.

Objectively, this whole coronavirus story is a war for markets, a war for consumers. There will be winners, and there will be losers. Pharmaceutical giants are also betting on the basic instinct. They bet on the desire to survive, the instinct of self-preservation. Can there be a stronger one? There is no doubt about the probability to play this card - the game is joined by giants, the capitalization of Johnson & Johnson is more than 200 (two hundred) times as much as the capitalization of Signet, but there are also Pfiser, Merck and others. True, the world will shudder more than once from new waves of corona- and other viruses, from bird, swine, mouse, rabbit and other kinds of flu... And there will be new vaccines, vaccinations, and diagnostic methods. It isn’t cheap, of course, but people want to live, right?

Unfortunately, the consumer's wallet is not endless. The scramble for this prize between the two marketing models appealing to basic instincts is a very interesting sight. At least the stock market sees an alarming signal as to who will get “V” (for Victory) and who will be satisfied with “L” (for Loser). Therefore, now more than ever it is important for the industry to expend not just efforts, but super efforts in the generic marketing of diamonds, which has been talked about for so long, but which requires a real decisive program.

Sergey Goryainov, Rough&Polished