06 April 2020
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The road back into markets
Seven fund managers discuss looking through the short-term volatility and finding opportunities amid the current market turbulence.
Geir Lode, head of global equities, international at Federated Hermes
Global Equities
Most investors do not remember the last comparable pandemic - the Spanish flu of 1918-19 - which is estimated to have killed at least 50 million people globally (about 3% of the population).
Then, like today, governments had to make decisions balancing the economic costs and public health.
The US anecdotal evidence from the media suggests a decline in business revenues between 40 and 70%, with a short-lived concurrent recession ending by March 1919.
As in 1919, we expect a quick economic recovery after the shock. However, the landscape will be permanently changed. Lockdowns and social distancing will favour automated businesses, a trend that will accelerate and benefit businesses such as Cognex and Daifuku.
As the pandemic plays out across the globe and people grow accustomed to social distancing, habits will change permanently. People will become more comfortable and efficient using communications technology, changing (perhaps reducing) the patterns of face-to-face meetings.
We expect more online doctor visits and home schooling. Universities will make greater use of the remote technologies they are currently adopting en masse.
We have already seen internet capacity stretched and more infrastructure is needed. Companies such as Micron Technologies and Lam Research are advantageously positioned.
The disruption of global supply chains and increased geopolitical tensions will make robust domestic supply chains more attractive. Companies operating in single countries will benefit, as will larger countries with diverse businesses.
However, there will be a cost to consumers of the added robustness. US steel companies and manufacturing companies will be among the biggest beneficiaries.
Hugh Grieves, fund manager, US equities at Premier Miton
US equities
Lack of knowledge is the only certainty at present given the unprecedented type and scale of this natural disaster.
Despite this vacuum, we must still make decisions and judgements.
Firstly is what the economy will look like in the future. Near-term, the economic data will be terrible and the medical data will continue to look frightening.
The steps however, taken by the Federal Reserve and the US government to put the American economy onto life support until the emergency is over, look to be effective.
Credit default swap rates (corporate bankruptcy insurance), appear to have peaked and are now declining sharply.
Stockmarket fear (as measured by the VIX Volatility index) also peaked at record levels and is also now declining. Longer-term, economies typically recover more quickly from natural shocks than financial ones which is hopeful. Looking further out, the investment world will look different. Leaders of the last bull market (large cap growth etc.) will probably not be the leaders of the next.
Instead, smaller companies typically do well coming out of a recession (after doing worse going in), and if inflation rises, then commodity and value sectors might do well.
We are certainly not going to carry on as we were before.
Alan Custis, head of UK equities at Lazard Asset Management
UK equities
We are spending our days talking to companies and trying to decipher cookie-cutter trading updates, but the situation is changing so rapidly that what was accurate last week is outdated already.
So what have we gleaned on these calls? Companies are being, unsurprisingly, very conservative at present. Their primary focus is on the welfare of their employees and then their liquidity, based on a range of scenarios. Having said that, there are pockets of the market that have been oversold, and where some companies are likely to be beneficiaries, either directly as a result of the virus or a change in longer term behaviour.
Clearly, the supermarkets will see material upgrades as calories are switched from dining out to being consumed at home. While one could argue this is a short-term benefit, our analysis suggests that both this year and next year will see upgrades, and with the shares down this year, we see value at the moment. Elsewhere insurance companies should be considered. As less miles are driven, there are less accidents. All the general insurance companies such as RSA and Direct Line should be viewed in a positive light.
Companies with high transactional exposure to the internet, such as Future plc and Dixons Carphone, are also well placed. Lastly, with hygiene standards remaining elevated for the foreseeable future after Covid-19 passes, companies like Rentokil and Reckitt Benckiser are also well placed to see strong demand for their products and services into the medium term.
Luke Barrs, head of the fundamental equity client portfolio management team EMEA at Goldman Sachs Asset Management
Secular growth opportunities
Through the current market dislocation, investors have an ability – and opportunity – to look long-term through the volatility.
While we are conscious that there are residual downside risks to growth, earnings and asset prices should we see further escalation, we are finding attractive, long term wealth creation opportunities arise as a function of knee-jerk selling, often driven by investors selling what they "can" (typically more liquid, higher quality names) as opposed to what they "want" to sell.
Within global equities, we are most excited by the opportunity to invest in higher quality businesses, aligned to key long-term growth themes, which are now trading at valuation levels we have not observed for a significant number of years.
This is particularly true in parts of Asia and emerging markets, where arguably some economies, such as China and Japan, are through the worst of the economic shutdowns, as well as in select parts of the US market, which we believe can continue to grow despite these existential concerns.
We are staying focused on themes that we believe have the potential to underpin long term success. First, is the ubiquity of technology, now breaking the bounds of sectors and disrupting not only business models, but fundamental ways of living.
In fact, we would argue that the recent Covid-19 shutdowns are potentially accelerating this transition, as more people are forced to adopt more digital behaviours.
Second, and one of the ripest areas for further disruption and value creation is healthcare, particularly companies at the forefront of genomics and precision medicine.
Both of these areas remain crucial to solving the Covid-19 crisis, but will also radically change how health care is provided in the future. This is a long-term theme, but one that has in some cases old off with the rest of the market, despite the potential for this crisis to accelerate the acceptance of new solutions.
As much as there are attractive secular growth opportunities out there, that we believe can be purchased at very reasonable valuations, there are also many businesses that face even more heightened risk of disruption and financial stress.
Being thoughtful around this – and employing an active management approach – should best position investors to capture this upside, while hopefully avoiding the more challenged parts of the market.
Niall Gallagher, investment director for European equities at GAM Investments
European equities
European equity markets have fallen by over 30% since the market peak in February 2019 and our assessment is that European equity markets were quite reasonably valued coming into 2020 so we believe that equity markets are now very cheap taking a medium term perspective (12-18 months).
It is encouraging to see policy makers responding with huge stimulus commitments, in a bid to offset the very sharp economic fall during the lockdown period, and the knock-on effects of mass unemployment and subsequent economic depression.
We are reassured by some of the measures taken so far across Europe. Measures such as direct income replacement by governments for workers who are furloughed (in some European countries), measures to protect self-employed workers and support for industries in lockdown will create a 'bridge' through the lockdown so that activity bounces back afterwards creating minimal long term damage.
We would like to see all governments take these short-term bridge building measures.
With these economic measures to prop up demand, where possible, and to provide consumers with the ability to fulfil postponed demand when the lockdown ends we are confident that economies will bounce back sharply when the lockdown ends.
For this reason, equities are likely to prove be very cheap at the current time taking a medium term view (12-24 months).
Ned Naylor-Leyland, manager of the Merian Gold & Silver fund
Gold and silver
The past few weeks have seen gold and silver mining equities mimic the depths of the 2008 equity market collapse. We are witnessing a full system deleveraging and liquidation event of biblical proportions.
Short of bandying around hypotheticals, it very much feels like nothing is off the table in terms of the potential reaction by authorities around the world.
But what do we know for certain? Gold and silver miners have been hard hit by forced selling of large gold ETFs.
The silver miners have been worst hit by this indiscriminate global deleveraging event but they also represent the best value; they are trading on historic-low NAV multiples just as operating costs fall (due to currency tailwinds) and energy prices collapse.
The market has ignored that, by revenue, 'silver miners' constitute around 70:30 gold to silver - as such, we maintain that they represent a clear value opportunity on a relative and absolute basis. Judging by the performance of gold and silver mining equities, the untrained eye would be forgiven for writing the asset class off as the single most vulnerable area of the global economy to Covid-19.
In truth, though, gold and silver mining equities are just one of a handful of areas of the global economy enjoying upward revisions to their earnings. The sell-off has been indiscriminate and that is likely to remain the case until authorities’ actions start to bear fruit.
But in the meantime, we are focusing on topping up positions in the highest quality gold and silver miners and awaiting the requisite policy foundations. No other sector in the world, barring perhaps hand sanitiser producers, is making more money right now than silver miners. Yet the sector is still down around 20% year to date despite the bug bounce of late.
When it snaps back, we will be well positioned to take advantage.
Ian Simmons, lead portfolio manager of the Fiera Capital Magna Emerging Market Dividend fund
Emerging market equities
Long-term success in emerging markets (EM) will be founded in companies which can grow their cashflows and dividends.
As such, we have some more growth-orientated companies in the portfolio, and sometimes these are in more economically sensitive areas such as banks and consumer discretionary.
This is where earnings can see a temporary decline in an environment of an economic standstill. We have, unsurprisingly, been receiving many questions on our expectations for dividends across EM at a time of economic shutdown and the resulting earnings cuts.
This is in part prompted by headlines concerning developed market companies with stretched balance sheets begging for bailouts and banks being forced to reduce or withhold dividends. Dividends typically track earnings and cashflows.
Normally, companies can only pay out what they have earned. EM companies, and certainly the ones we seek out for this portfolio, have generally avoided the worst excesses of the US where buybacks and dividends have been funded with cheap debt.
Some companies have reported their dividends linked to earnings in 2019 and guided for 2020 dividends, while others may not even announce payments linked to 2019 for another couple of months.
Those due to report in the coming weeks will be doing so at the height of economic and social uncertainty and so may be more inclined to be conservative.
Among our holdings, companies should be comfortable with their balance sheets but may choose to be more cautious than normal, or indeed, than is necessary. Some companies have already suggested that assuming the virus passes and life returns to normal, they will attempt to make up for any skipped interim dividends around the end of the year.
Many of our holdings had special dividends last year and could do this again later this year. This is one of the reasons why we expect our dividends to be more resilient than the wider market. Looking to the risks and opportunities across EM more broadly, US dollar strength has been especially notable against a handful of EM currencies and this also affects dividends received by investors in the fund.
As the dust settles and we survey a world where the only real yield to be found is in EM, then we would expect to see some reversal of EM FX's recent weakness.
The MSCI Emerging Market index is down 25% and the range of performance between key markets is -10% to -50%. The current 1.2x price/book multiple is already the same as in prior US recessions.
With both undervalued currencies and undervalued stocks, the 12-month return profile for EM has historically been extremely favourable.
Seven fund managers, spanning a range of assets and sectors including US equities, gold & silver, UK equities and emerging markets, discuss looking through the short-term volatility and finding opportunities amid the current market turbulence.
Seven fund managers, spanning a range of assets and sectors including US equities, gold and silver, UK equities and emerging markets, discuss looking through the short-term volatility and finding opportunities...
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