Keep calm and carry on

20 March 2020

It has been a rocky start to the year for stockmarkets this year as the threat of COVID-19 first announced in December 2019, became an official pandemic and caused chaos to stockmarkets, the worst since the Global Financial Crisis. 

Coming off the devastation caused by the bushfires over the summer which dented Australia’s economy and led to a dearth of tourists in the peak summer season, the combination could tip Australia into a recession.

At the time of writing (19 March), there had been 568 cases of coronavirus confirmed in Australia and six deaths. However, Australia was far less affected than other countries such as China and Italy where cases and deaths were well into four figures and global cases reached 214,000. 

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The panic caused by the virus was hitting stockmarkets, commodity prices, the oil market and investors’ portfolios. The ASX 200 had fallen 25% since the start of the year, compared to returns of 11% for the same time last year. 

Meanwhile, US and UK markets were reporting some of their biggest falls since 2008 with one-day falls of 10%-12%.

The ASX 200 reached a record high of 7,784 in mid-February and has been falling ever since but managers pointed out there were several causes that had been hindering the market’s progress. These included falling retail sales, soft underlying growth and the bushfires over the summer. They also pointed out the market was overdue for a correction given how quickly it had risen and how long Australia had escaped a recession. 

The last time Australia had a recession was in September 1990 and it lasted for a year. 

Shane Oliver, chief economist at AMP, said: “Underlying growth was soft even before the coronavirus came along and our assessment remains that the hit from the bushfires and virus – mainly to tourism, education and commodity exports – will see the economy contract in the current quarter.

“While our base case has been that growth will bounce back in the June quarter, it’s now looking like it will be negative too as the spread of coronavirus drags on global growth and economic activity in Australia. Particularly if the onset of winter sees coronavirus take longer to stamp out in Australia than in the northern hemisphere. As such we are now forecasting two negative quarters in a row in Australia. Unfortunately, this would mark the first recession since the early 1990s.”

A recession is officially defined as two consecutive quarters of negative growth as measured by a country’s gross domestic product (GDP). 

Anton Tagliaferro, investment director at IML Investors, said: “The Australian stockmarket is correcting but then it was due a correction anyway as it rose very quickly in a few months. A few negative quarters would put us into a recession but if it is only a shallow one caused by one-off factors then that isn’t too bad, it is when it becomes a deep recession that it is a problem”.

“The situation is not over yet by a shadow of a doubt, the economic impact will take three to six months to unfold but there is a wide divergence between sectors. Australia is likely to fall into a recession, it is hard to see how we can escape it,” said Eiger portfolio manager Stephen Wood.

ARE ANY SECTORS A WINNER?

There was doubt among managers whether there would be any winners from the COVID-19 and Lazard Australian equities portfolio manager, Aaron Binsted, said: “There won’t be any real winners, the only winners would be those companies that fell less than the others”.

He suggested these included retailers such as Coles and Woolworths which could benefit from people who were quarantined, Coles is up 17% and Woolworths is up 10%, as well as online delivery services like Dominos. 

Paul Taylor, manager of the $4.9 billion Fidelity Australian Equities fund, held both Coles and Woolworths in his portfolio but had a preference for Coles which was a 4% position.

“Consumer staples are well-positioned especially supermarkets, Coles is running flat out to keep up with demand and is in a strong position. [Rival supermarket] Kaufland has pulled out of Australia which is a positive for Coles as it is no longer a threat, nor is Aldi. We hold both, and Woolworths is still in a good spot and is due to demerge from Endeavour, but we prefer Coles.”

Tagliaferro, who runs the $2.7 billion IML Australian Share fund, said: “There are sectors such as education and tourism which are directly impacted and have been heavily sold down and there are sectors such as luxury goods like LVMH which are feeling the spill-over effect.  

“Then there are those like Coles and Telstra which have seen less effect from coronavirus and it’s worth looking at the valuations and earnings of those. These companies aren’t going to disappear overnight, they have good balance sheets, are competitively positioned and have very long licences.”

Wood, manager of the $5.6 million Eiger Australian Small Companies fund, said healthcare firms were attractive as was IT firm NextDC, they were among a few stocks which had seen an uplift in share price.

New Zealand firm Fisher & Paykel Healthcare, which produces respiratory equipment and listed on the ASX, is up 23% year to date and Wood also namechecked Capital Health Group and Integral Diagnostics which specialised in CT scans. 

Wood said: “Fisher & Paykel produces respiratory equipment and consumables which can only be used once. The boost to the business will be more than shortlived and it could give the business a big step-up.

“Healthcare firms will do well and see increased activity, they are defensive stocks so are less reliant on consumer spending.”

In a report from UBS COVID-19 - Analysing the market sell-off, it said: “We think the declines [in growth stocks] could present opportunities for growth as lower bond yields are more positive for growth and if COVID-19 effects are only temporary, the impact of lower near-term earnings on valuations should be lower for growth than for value.

“We continue to prefer growth over value stocks as the spike in VIX means a cyclical recovery appears to be on hold. Furthermore, if COVID-19 effects are only temporary, the impact on valuations for growth stocks should be lower than for value stocks as less of their valuation is based on near-term earnings.”

THE BIGGEST LOSERS

On the other hand, there were innumerable stocks which had seen their earnings dented by COVID-19 and more expected as companies begin to launch their full-year results. 

Stocks which have suffered range from travel firms and airlines to wine retailers and technology firms. 

Since the start of the year to 19 March, Webjet is down 71%, Corporate Travel Management has fallen 67%, Flight Centre has fallen 66% and WiseTech is down 49%.  

While technology firms were not an obvious target for COVID-19 unlike other sectors like travel, the companies were being hit as many of their components were manufactured in China. 

WiseTech warned the outbreak would have a ‘profound impact’ on its performance. In a stock exchange announcement, the cargo software firm said: “The unexpected outbreak of coronavirus and the effective shutdown of China, a critical driver of the global manufacturing supply chain and a -16% contributor to global GDP is creating negative flow-on effects to the manufacturing, slowing supply chains and an economic trade across the world.

“While we have a diversified array of revenue drivers that provide resilient organic growth across our global platform, we do anticipate the manufacturing slowdown will delay execution of logistics activities by logistic services providers.”

Other affected technology firms included editing software company Atomos down 74%, Kogan down 43% and health informatics firm Alcidion down 37%.

For some firms, the impact had been so bad that they were forced to take emergency measures to mitigate the effect. Qantas, which has seen its share price fall by 63% since the start of the year, suspended all international flights from the end of March and reduced domestic flights by 60%. This meant  around two-thirds of its 30,000 employees would be ‘temporarily stood down’ from work.

It also triggered cost measure actions such as cancelling annual management bonuses for the full year 2020 and no salary for the group chief executive Alan Joyce. Travel agent Flight Centre was to close 100 stores due to a downturn in sales with managing director Graham Turner saying reducing costs was a priority for the business. 

BUYING OPPORTUNITY

For some fund managers, the sell-off presented opportunities for picking up stocks at attractive prices. 

Randal Jenneke, head of Australian equities at T. Rowe Price, said: “We have been taking advantage of the sell-off particularly in the high growth quality part of the market.

We entered the correction with a higher than normal cash level which we have been deploying particularly in the beaten-up technology sector. 

“As a result, we have increased our exposure to this part of the market. We continue to maintain our overweight position in consumer discretionary and consumer staples and remain overweight high-quality, structural growers and companies that have direct exposure to stronger overseas economic environments, particularly the US.”

Referencing its Australian Share Income fund, Merlon said: “We are looking to add exposure to companies whose share prices are weak due to current fears and where we have confidence balance sheets and business models are sufficiently strong to trade through the turbulence.”

Hamish Douglass, manager of the Magellan Global fund, said he would even be “excited” by the buying opportunities presented by COVID-19.

“We are not changing our portfolio, if it gets worse then I’ll get excited because it will present interesting valuations, but things are not at these mouthwatering valuations yet. It will be very volatile.

“It will have a short-term economic impact but it is very hard to know, I don’t regard it as the next Global Financial Crisis.”

WHAT SHOULD INVESTORS DO?

For the casual investors, the doom and gloom of the stockmarket combined with health and Government warnings on keeping safe can make it easy to panic. But investors should try to resist the tendency to sell at a low and maintain their exposure, or even buy on the dips. 

Tagliaferro said: “It depends on whether they are in a highly-geared company like WiseTech, in which case they should be worried, or if they are in good quality companies like Crown Resorts and Sydney Airport then they don’t need to worry so much.”

John Birkhold, partner at Origin Asset Management, said: “For Australians, who’ve gone over 20 years without a recession, it’s easy to forget what can happen when things go bad. Long-term investors need to remember that in turbulent waters, it’s usually best to stay in the boat rather than trying to change strategies. However, investors need to be able to withstand another drop, particularly given that markets typically fall 30%-40% during recessions.

“On a positive note, this will be transitory and we will eventually come out the other side once science is able to mitigate nature’s damage. Well-managed companies with low financial leverage and reasonable market expectations should be in a position to benefit and increase their market share.”  

This was echoed by Fidelity’s Taylor who said it could be a good opportunity to pick up cheap stocks in the resources, travel or technology sectors.

“This is an opportunity to upgrade and pick up those stocks you have always wanted to own.”

Oliver said: “Selling shares or switching to a more conservative investment strategy after a major fall just locks in the loss. When shares fall, they are cheaper and offer higher long-term return prospects. So they key is to look for opportunities the pullback provides. 

“The best way to stick to an appropriate long-term investment strategy, let alone see the opportunities that are thrown up in rough times, is to turn down the noise.”  




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