Investing for a recession and a recovery
With the country coming to a grinding halt in March, UK GDP (a measure of the total value of goods...
Lenin’s quote: “There are decades where nothing happens; and there are weeks when decades happen,” seems very apt at the moment.
Just six weeks ago we were talking about the longest stock market bull run in history – maybe over a pint in the pub with our friends, after a long day in the office.
Today we are talking about the fastest ever fall into a bear market – via video conference, from our homes, in lockdown.
Markets have been a little calmer this week, taking a breather from the frenzy. So, we took the opportunity to garner the views of some global fund managers. Here’s what they had to say.
“This is my third major stock market crash as an investor, David Eiswert, manager of T. Rowe Price Global Focused Growth Equity, told us. “I started out in fund management in 1999, just before the tech bubble burst.
“Most crises are caused by too much debt and misallocated money, and it takes several years to work off the excesses. That is not the case today. There is a natural force in the world that has created a ‘stoppage’.”
James Thomason, manager of Rathbone Global Opportunities added: “This bear market is unique. It’s been the fastest 25% drop in history and there has been an explosion of volatility. We’re heading for a global recession – the only question is how long and how deep it will be. For now, monetary and fiscal policy is the bazooka acting as a cashflow bridge.”
“Share price volatility has been extreme,” continued Dan Roberts, manager of Fidelity Global Dividend fund. “But given how strongly equities have performed over the last 10 years – and the deteriorating outlook for corporate earnings – we don’t think it’s as easy as saying equities have fallen so far that they must be good value.
“It’s fair to say that most businesses will be impacted in some way or another by what’s going on. And material cuts to corporate earnings are inevitable.”
“In February, when the virus moved to Europe, I took down the risk in the portfolio – anything with net debt I moved out of,” said David.
“Today, I’m looking at existing holdings, but also those that I really liked before, but which were too expensive. Any marginal holdings I’m simply selling.”
“When the situation stops getting worse, we’ll know the stock markets have bottomed. Not when it starts getting better – by then investors will have missed the bounce, but when it stops getting worse.
“And it will have stopped getting worse when governments are acting with enough urgency, there is widespread testing and treatment, and there are antibody tests. At that point we’ll change the way we are thinking about the crisis.
“So today I’m preparing for that ‘stop getting worse’ time. I’m asking myself: what companies do I like even if this crisis lasts a long time? What companies are the right side of change?”
James agrees that it’s time to prepare for the future. “Last month, I put more money to work than any other time in the history of the fund. Around £100 million was spread across the portfolio and, on a five-year view, I think it will be rewarding. I’m preparing for a future bull market.
“Within the portfolio, the stocks hurt the most have been the retailers where stores have shut, and those in the payment ecosystem – whose only Achilles heel is a global recession.
“I also have an oven manufacturer and a chip supplier – although I’m sure demand for chips will bounce back – and of course social distancing and dating are not a match made in heaven – so Match.com has been impacted.
“But I have no exposure to airlines or cruise lines and 60% of the fund is in US dollars – a safe haven asset for now and a helpful buffer for returns.
“I also have some ‘Coronavirus safe havens’ like Ocado, which has been a top performer in the FTSE 100. It has experienced 10 times more demand and is at full capacity. Amazon has benefited too and has helped its reputation by clamping down quickly on bad practice from suppliers. Netflix is also strong: first-time downloads were up some 30% in March, and Costco’s international expansion is now paying off.”
Dan added: “Within the strategy, we have a couple of specific holdings where the impact has the potential to be significant: Informa, the exhibitions business, for example, which is in the cross-hairs as you’d expect. We are speaking regularly to the management team and are monitoring the impact closely. Vinci is another – an owner of transport infrastructure such as airports and toll roads.
“On the positive side, our holding in Roche has added relative value. It has a pristine balance sheet, good momentum in newly launched products, fantastic pipeline across a variety of therapeutic areas and of course a Swiss dividend yielding over 3% – the attractions are obvious.
“Kimberly Clark has also been very strong – among other things, it sells toilet paper, tissues and wipes – but we see the management as top-tier capital allocators in a sector where poor capital allocation is one of the main risks.
“We remain focused on owning quality franchises at attractive valuations. If anything, in times of stress we place even greater focus on balance sheet strength. We’re also thinking about whether these events lead to a longer-term impairment of the franchise for any of our portfolio companies. Or indeed, whether they may benefit.
“We have been deploying some cash, predominantly in existing holdings, which in our view have been indiscriminately sold down. But also, one or two new stocks. We have a ‘subs bench’ – companies we’d like to own at the right price. We now expect some to make it into the portfolio.
“But at times like this is it important to remember that even a great business can go bust if it doesn’t have enough liquidity to get it through the tough times.”