3 industries to consider investing in during coronavirus
Investment expert Garry Laurence looks at key factors affecting the stock market and three industries that show promise for Australian investors right now.
The last time global economies looked this weak was in 1938. If you asked me a few months ago how much would I expect the stock market to be down under this scenario, I would have expected a lot more than the current 11% decline in the S&P500 and the 3.5% decline in the Nasdaq year to date.
The varying degrees of performance in different global markets seem to have more to do with the mix of sectors and stocks in each index than the economic impacts of the pandemic. The S&P500 is now more concentrated than ever with the top 5 companies representing 21% of the index.
Microsoft, Amazon, Apple, Alphabet and Facebook have performed incredibly well over the past few months, as people have been staying home for both work and play. Amazon is up over 28% year to date while Microsoft is up 13%.
Facebook has been the worst-performing stock out of the top 5, down 13%. Both Facebook and Alphabet are businesses that will be tested now as it is hard to see advertising spend holding up in the current environment.
The impact of federal bank action
The Reserve Bank of Australia and other central banks have shot every bullet they have in the past month. In Australia, the RBA cut the official cash rate to an all-time low of 0.25% and has talked about following Europe and Japan with other quantitative easing measures. In the US, measures from the Federal Reserve include cutting the federal funds rate to zero and purchasing $700 billion in US treasuries and mortgage-backed securities. This has flooded financial markets with liquidity and this has quickly found its way into equity markets.
So we are at a crossroads where money is free and, while fundamentals appear to be deteriorating, the stock market is rejoicing in this new flow of funds and declining discount rates.
Options for Australian investors
About three weeks ago, I recommended that people start investing in global stocks while hedging their currency back to Australian dollars. The Australian dollar dipped below 60c to the US dollar but as the interest rate differential between Australia and the US has disappeared, it makes sense to focus more on our local currency right now for the sake of stability.
Furthermore, I think Australia has dealt with the pandemic exceptionally well over the past three weeks.
The issue we have in Australia is that we don't have a deep pool of stocks in a variety of sectors. I have been adding to existing positions and buying stocks in essential service sectors.
The stocks I have been focusing on include technology stocks like Alibaba, which is the leading ecommerce and payments company in China as well as a leader in the cloud. It is China's equivalent to Amazon but trades on valuation levels that are half of Amazon. While most people have only heard of US large-cap tech stocks, the opportunity to buy high-quality businesses trading at a discount to fair value is much greater outside of the US.
Proctor and Gamble recently posted its biggest US sales increase in decades with US sales up 10% for the March quarter. In the months of March and April, packaged food sales around the world have been growing at a double digits pace.
The largest position in the fund I manage is Nomad Foods, which has over 15% market share of the UK frozen foods market (including well-known brands Birds Eye and Aunt Bessie's). It has also been seeing double digits growth in sales over the past few months as people start to eat at home a lot more.
Healthcare is another sector that will continue to do well, irrespective of how the economy goes over the next year or two. Companies like United Health, a leading health insurer and technology provider to the US healthcare system, and Fresenius Medical, a leading provider of dialysis equipment and services for patients with chronic kidney failure, continue to deliver a nice steady stream of earnings and cash flow.
Other market factors
Two to three weeks ago, there was a lot of fear and valuations were attractive. At the moment, I am starting to see a lot more greed, despite economic fundamentals that are still deteriorating.
I think the biggest bounce will come from cyclical companies, once we exit this recession, but it is not clear exactly when we will exit this recession.
So for the time being, I think the best plan of attack is to continue to accumulate quality companies in essential services, that are trading at attractive valuations, while keeping some powder dry for a reporting season in three months' time – which will reveal how weak the economy really is.
Charlie Munger, vice chairman of Berkshire Hathaway Inc. and Warren Buffett's long time business partner, likes to say that one of the keys to great investing results is "sitting on your ass". That means doing nothing the vast majority of the time but buying with aggression when bargains abound.
Berkshire Hathaway is also one of our biggest positions, and Buffett hasn't really deployed the significant pile of cash on its balance sheet, which represents about 20% of its portfolio of companies and stocks.
Munger was recently quoted in the Wall Street Journal as saying that we are having a recession and "the only question is how big it's going to be and how long it's going to last. I think we do know that this will pass. But how much damage, and how much recession, and how long it will last, nobody knows".
With that in mind, I wish you all good luck in your investments and hope you are keeping healthy and safe.
Garry Laurence is the global equities portfolio manager for Perpetual Investments and has been managing the Global Share Fund since its inception in January 2011. Prior to this, Garry was co-portfolio manager of an Asian fund from 2009-2011. Before joining Perpetual, Garry spent three years working with PM Capital as an analyst covering the financial sector for global and Australian strategies, and one year with Commonwealth Securities as an analyst. He also gained experience at Morgan Stanley and Meridian Equities as an analyst while he was studying. Garry has a Bachelor of Commerce and a Bachelor of Laws from the University of New South Wales.
Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.
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