Update as at 9th April 2020
Accelerating trends may provide long-term opportunities
In our previous update on COVID-19, we noted that the extreme monetary and fiscal response may go some way to mitigate the worst of the economic damage and prevent a financial crisis. We continue to hold that view, we think the level of liquidity provided by central banks across the world and the fiscal stimulus in place will have the desired effect of heading off a financial crisis.
Recent statistics show the progression of the virus slowing in many territories, which has given the market cause for optimism. Whilst we refrain from making market calls and will not speculate as to whether we are ‘at the bottom’, we do feel that many of the valuations – certainly relative to the current interest rate environment – are likely to offer attractive returns on a medium-term view. We expect robust companies to emerge stronger with fewer or weakened competitors.
The lower valuations have given us the opportunity to initiate new holdings, or add to existing ones, in companies that we had previously felt were too richly valued or where volume was difficult to find. We have also reduced our already small exposure to cyclical or financially and operationally geared companies to essentially a nil weighting.
Clearly, we must be mindful of the risks created by the economic dislocation caused by COVID-19. However, it is likely to be futile to try to predict the precise point at which the economic environment begins to normalise, so instead we have taken steps to de-risk the portfolios by selling the cyclical names in favour of ‘quality’ companies now on much lower valuations. We expect these to be safer investments, whilst having significant upside at current prices. We continue to think the outbreak will accelerate trends already in place before the pandemic: e-commerce, flexible/remote working and the growth of video games, to name a few. Whilst some companies are experiencing a short-term boost in like-for-like sales, we do not see this as a valid reason to buy these stocks, as it is a one-off benefit that is likely to reverse in a more normal environment. What we see as the bigger opportunity is buying into companies that will benefit from the acceleration of trends like those listed above, where a more lasting change in the behaviour of customers or clients is developing.
Marlborough UK Equities team
Update as at 20th March 2020
Identifying stocks where the market has overreacted
The COVID-19 outbreak has sparked one of the most dramatic periods in modern times both from a market and a geopolitical perspective.
The speed and magnitude of the declines in equity indices have made history. The impact of the COVID-19 pandemic has shifted from being primarily a supply-led issue to principally a demand-led issue, with the attendant liquidity ramifications for those businesses that cannot weather the storm. As we commented in our February monthly reports, we tend to avoid high-fixed-cost, low-margin and financially geared businesses as a matter of course. These are the businesses that will be under the most pressure, although the majority of firms will feel at least a short-term impact.
The key from here is finding the stocks where the market has overreacted, and we think there are many, and where the market has underreacted, where again there are many. For companies with strong competitive positions, operating models and balance sheets this presents a significant opportunity to take market share and potentially acquire cheaply, while also capitalising on trends such as working from home, healthcare and the de-risking of supply chains. For stock market investors, lower valuations for quality companies are likely to decrease risk and increase total return expectations.
Regarding what we are hearing on the ground, we have spoken to a number of our companies with operations in China and most are starting to report that they are up and running at between 70-100% of capacity utilisation as of this week. If the China path is to be followed, European countries may be able to report similar news by late summer, with some timing differences based on geography and industry.
We have seen historic levels of central bank and government action across the globe. There has been an unprecedented fiscal and monetary response, with the provision of some financial aid and liquidity to individuals, businesses and those banks that will need it. This will go some way to mitigating the economic damage. While we are not top-down investors and would caution against making precise economic predictions given the many variables in play (and their inter-correlations), we would observe that the markets recovered from the Great Financial Crisis in 2008, from the dotcom crash in 2000 and from other crises before that. Indeed, those would have been good times to buy and the worst time to crystallise losses. So, while we do not know exactly where the bottom of the market will be, we feel the risk/reward balance is now much more attractive, given current valuations, and look forward to finding more opportunities for our investors.
Marlborough UK Equities team
Capital is at risk. This is not advice. The value and income from investments can go down as well as up and are not guaranteed. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.
Issued by Marlborough Fund Managers Ltd, authorised and regulated by the Financial Conduct Authority (reference number 141660). Registered office: Marlborough House, 59 Chorley New Road, Bolton, BL1 4QP. Registered in England No. 02061177.