Investors should redefine defensives
The fallout from the COVID-19 pandemic has forced investors to re-evaluate what businesses are deemed safe, defensive and essential, Eley Griffiths Group has warned, as traditional ‘safety trades’ such as utilities, real estate investment trusts (REITs) and infrastructure were no longer immune from a pandemic-induced market correction.
Investors needed to be aware that their assumptions in a pre-virus world were no longer appropriate for these markets, meaning that property owners were likely to result in mass rent deferrals and infrastructure assets such as Auckland Airport with a defensive earnings stream, were suddenly staring down the likelihood of less than 5% of air traffic in the coming months.
At the same time, New Zealand’s electricity demand was likely to see double-digit declines as a result of a lockdown.
“As the pandemic took hold and markets reacted violently, the assumptions made at the beginning of March, were no longer valid some 2-3 weeks later. When indiscriminate selling took hold and liquidity was king, fundamental ‘safety trades’ were not immune,” the group noted.
“As the gold price fell 12.5% from peak to trough in March, the stocks followed suit. The inflation hedge was questioned post the emergency rate cuts but was back in vogue post the Fed committing to unlimited QE & corporate bond buying.”
Following this, assumptions were even harder to make, given a lockdown being put in place for an indefinite period, which meant zero revenue for some businesses for an extended period of time.
On top of that, there was a massive fiscal stimulus measures announced almost daily which saw some employers receive compensation for keeping employees on the books and industry-specific assistance was handed out to those in need.
“As we close out May the number of ASX announcements that mention re-opening in the headline, outweigh the balance of negative news-flow at the beginning of every day. Undoubtedly the assumptions made by many during the midst of the pandemic, will prove incorrect,” the firm warned.
“Some, in the case of retail, may be too conservative while the impact on earnings across emerging companies will only become apparent as the final touches on FY20 earnings are put together come July.”
Therefore investors would be forced to retest their assumptions and start focusing on how companies could regain lost earnings, and the time it would take to recover to FY19 levels.
“For now, time is best spent validating your current assumptions regularly and being open minded to what lays ahead.”
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