The efforts to contain the spread of Covid-19 have arguably been more difficult than what we saw with SARS in 2003 and H1N1 swine flu in 2009. The impact this time has been especially pronounced given China's growing role over the last decade in global supply chains and the world economy overall. The good news is that, unlike natural disasters such as floods and earthquakes where there is physical infrastructure damage, we expect capacity to bounce back once things return to normal. The downside for investors is that this may cause governments to wait and see how the virus spreads before turning on the fiscal taps. Although, some central banks, such as the Federal Reserve and the Bank of Japan, have hinted at further monetary stimulus, which may help to stabilise markets.
We're in uncertain times
The market outlook is currently uncertain as the pace of Covid-19 spreading or the success of containment are both unknown at this stage. We feel that the correction is overdone, and the fundamentals for water and waste companies remain very strong. In fact, there may be long-term benefits from the current situation, as environmental standards for water and waste services are raised.
Is there more to come?
While infection rates will stabilise and economic disruption will eventually subside, it is too early to say whether the recent market sell-offs mark the bottom or not. Markets had been expecting a poor Q1 followed by a rebound in Q2. We now believe that the peak of the bad news for earnings and GDP growth is likely to be in Q2 - potentially persisting into Q3.
With the UK cutting interest rates, expectations for further central bank and government intervention remains high. However, monetary stimulus has limited impact and fiscal stimulus, which can be much more effective, will take time to materialise. Economic and market impacts are rarely synchronised, so as evidence of stabilisation of the virus spread comes through, markets are likely to rebound even if the economic effects have yet to play out.
Overall, while stock markets are likely to remain volatile in the short-term, we continue to monitor the impact on fundamentals and focus on identifying robust businesses that can weather a tougher market environment. The Fidelity Sustainable Water & Waste Fund investment process will continue to be implemented consistently, we are not inclined to make radical changes to the portfolio but may seek to take advantage selectively where compelling companies have sold off in the wake of the current risk-off environment. The potential change of behaviour resulting from a new focus on sanitation, could mean water and waste management might see revenues increase in the near future on the back of bigger awareness about these fundamental needs for our global economy.
Our thesis on the broader need for proper water and waste management continues to be underpinned by:
- Population growth
- Higher wealth and consumption
- High infrastructure investment needs
- Regulation and healthcare needs
- Scarcity of resources
The fund continues to hold Clorox - a producer of household cleaning and waste management products, which can benefit from increased sales of cleaning wipes and anti-bacterial products. Another holding, Ecolab - a US business acting globally providing products for water quality and sanitisation, can also benefit. In addition, most regulated water names benefit from full pass through of costs, so these companies should remain resilient. Utility companies, in general, have a very high visibility of cashflow and any monetary easing could act as a support.
We maintain a diversified exposure in the portfolio of around 45-49 names in order to limit risk. While staying fully invested, we are able to manage flows and cash effectively to benefit from broader market sell-off and our defensive nature means that we are invested in companies with less exposure to significant economic slowdown. We are also positioned to participate in the likely benefits to sanitation related names.
The current market sell-off has priced in a lot of bad news already, but the upside to 2021 appears steady once the Covid-19 fears fade away.
This information is for investment professionals only and should not be relied upon by private investors. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities but is included for the purposes of illustration only. The Investment Manager's focus on securities of companies which maintain strong environmental, social and governance ("ESG") credentials may result in a return that could, at times compare less favourably to similar products without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security's ESG credentials can change over time. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and annual and semi-annual reports, free of charge on request by calling 0800 368 1732. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0320/26925/SSO/NA