By IML Investment Team
The sell off in equity markets that began in the last week of February 2020 continues into March, despite rate cuts in both the US and in Australia. The fear of the coronavirus’ impact on global GDP and corporate profits continues to cloud the outlook for many sectors of stockmarkets around the world. Talk of the possibility of fiscal packages to boost GDP in various countries has also failed to stop the selling at this stage.
As the sell down increases, the valuation of many stocks is becoming more appealing and if past crises are anything to go by, hopefully in 6 to 12 months’ time we will be looking back wondering why this virus had such a big impact.
It’s important for investors to remember that much of the rise in the stockmarket in the last year or two appears to have been driven by quant/momentum type strategies which bought on every upgrade to push many stocks to very high valuations. Clearly as many companies are now downgrading earnings – based on the coronavirus’ potential impact on world growth – many of these strategies are now unwinding positions in stocks whose short-term earnings are affected by this epidemic.
Our thoughts are as follows:
- At IML we take a long-term view to our investments and our ownership of underlying businesses. We are not rushing in to spend the cash held in our funds. We are carefully watching the market for value to emerge as preferred stocks are being derated.
- There is no doubt that some stocks – including a few we hold – will be impacted directly by the coronavirus – stocks such as Sky City, Crown and Events. As mentioned in our previous note all these companies have strong balance sheets and they continue to hold very strong positions in their respective markets. While their short-term earnings will be impacted to varying degrees, their long-term position remains sound and at this stage we are maintaining our weightings in these companies. At some stage soon we may start topping up on these sorts of companies as their valuations are beginning to look very attractive from a medium to long term point of view.
- There are also many companies whose earnings seem unlikely to be greatly affected by the virus. This includes very resilient and strong companies such as Telstra, Coles, Ausnet, Woolworths and Aurizon. Many of these companies’ share prices have pulled back to varying degrees and this is an area we are looking closely for opportunities at the right price to top up our existing holdings. In fact, we are currently topping up on a couple of these types of stocks already.
- Regarding Financials, given that the recent cut in interest rates will likely put further pressure on net interest margins in the next year or two, we remain cautious on the Banking sector as a whole and we are not inclined to add to our positions at this stage. Insurance stocks such as IAG and Suncorp are starting to look interesting. While this year’s earnings for these insurance companies will be impacted by the fires and floods of a few months ago, their outlook beyond FY 2020 continues to look fairly strong as they recover claims from this year through rising premiums.
- The Resources sector has also fallen sharply as both the lower oil price and fears over declining demand for iron ore – given what is happening in China – have hit the sector materially. To some degree, the fall in the Australian dollar will offset some of the falls in commodity prices, however it is an area we continue to treat with a degree of caution given the large sensitivity of these companies earnings to global GDP and commodity prices. Having said that we are seeing some value emerge and are looking to buy selectively into the best positioned companies.
While the news around the virus is unlikely to get better in the short term as travel bans are extended and the number of reported cases around the world increases, it pays to take a patient and measured approach.
The fact is that interest rates are likely to stay low for the forseeable future and when the current crisis is over people will be once again looking for good quality shares to help fund their income streams in their retirement.
IML’s portfolios remain skewed towards good solid industrial companies and all our Funds have a long track record of paying solid distributions to investors independent of market conditions.
We continue to remain comfortable with all the holdings in our portfolio and are diligently looking to see what stocks we should be buying in the current market correction.
More from Anton Tagliaferro
While the information contained in this article has been prepared with all reasonable care, Investors Mutual Limited (AFSL 229988) accepts no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This advice is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company may have been mentioned should not be interpreted as a recommendation to buy, sell or hold that stock.
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