31 March 2020
The coronavirus has certainly taken hold of markets. The ASX hit an all-time record high on 20 February 2020. Since then, the onslaught of the virus has caused stocks to fall around 30%.
The situation is fast moving, and has clearly worsened in recent weeks. Governments are playing catch up and incrementally tightening restrictions in an effort to contain the spread of the virus. Their efforts in dealing with the virus have very serious consequences for the economy. Very quickly, we have found ourselves in a recession, with many businesses forced to close down and many jobs lost.
Corporate earnings will take a massive hit. How big a hit and for how long they are down remains uncertain. Indeed, a very large number of ASX-listed companies have pulled their earnings guidance entirely, without even offering downgraded guidance.
Reflecting the uncertainty, the stock market remains very volatile, with sharp moves day to day and even intraday. Investors too are grappling with the outlook.
In response, central banks and governments around the world have undertaken large-scale monetary and fiscal stimulus. In Australia, the RBA and Federal Government have taken unprecedented measures, including quantitative easing and widespread cash handouts respectively. These measures are aimed at building a bridge for the Australian economy to get over until it has the all-clear to come out of hibernation. Again, it is uncertain how long this will be.
However, the cause of the current situation is a biological one and cannot be treated just with monetary and fiscal stimulus. Only by dealing with the spread and harm of the virus, as well as community fears, will our society, economy and markets be able to move forward.
For the stock market, investors appear focused in the near term on seeing evidence of containment, and in particular a slow-down in the new infection growth rate. This could well come in the coming weeks or months, and will provide investors with some light at the end of the tunnel. However, even then, there is likely to be restriction required to keep the virus under control. It will be important for investors to understand how these restrictions affect each company specifically.
Fortunately, there appears to be an end point to all this: a readily available vaccine. With a vaccine, it is likely we can return to normal, or something resembling as much. Unfortunately, a vaccine appears to be some 12 to 18 months away, based on the prevailing medical wisdom.
In the meantime, the direction of the market will remain driven by news flow and the then prevailing mood of investors. This is all quite unpredictable, meaning there is little value in trying to pick the bottom (if it hasn’t already come).
What we do know is that stocks are trading at prices around 30% less. While there is a real need to be selective in what you’re invested in, there are a number of stocks which in our view offer very attractive value. Sometimes this requires looking over the difficulties they may face in the next few months or even years. But we can be confident in an end point, and then their value will be recognised for a lot rosier outlook.
In terms of our investing at BAEP, we have been particularly focused on quality. For each stock, we have focused on the durability of its business, likely earnings in a severe downturn, and the strength of the balance sheet. Here, we want to be invested in companies that should come out the other side largely unharmed and which can then continue or return to growing earnings and therefore shareholder value.
Consistent with our focus, we have taken the opportunity through the market falls to upgrade the overall quality of the portfolio. This is a normal part of our portfolio management in which we proactively and continuously manage both the risks and opportunities within the portfolio.
To generalise, our portfolios are heavily populated with industry leaders (often global leaders) with strong balance sheets and strong long-term growth potential.
We hold a number of stocks across our portfolios that are holding up well in this environment. For example, our largest holdings are healthcare names CSL and Fisher & Paykel Healthcare. Fisher & Paykel manufactures ventilators that treat the coronavirus and which are currently in surplus demand. We also hold a number of stocks that stand to benefit from all this. As just one example, Aristocrat’s far stronger balance sheet than competitors means it will be the last man standing or allow it to invest to take market share.
We are very comfortable in our portfolios’ ability to weather the storm and prosper on the other side.
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