Winners in the rout | Fin24

Winners in the rout

Mar 26 2020 11:18
Jaco Visser

Asking investment managers which stocks may pose value as the coronavirus rips through world markets and forces economies around the globe to their knees, may sound premature. But specks of light are starting to emerge amid the darkness of one of the world’s largest sell-offs in generations.

“There is a caveat,” warns Stephán Engelbrecht, fund manager at Anchor Capital. “If this virus continues after Easter weekend, there will be a real impact through job losses, insolvencies and economic contraction.”

The best outcome for the economy and markets in general is for the spread of the virus to be flattened out over a longer term – or, in other words, to slow the spread of contamination and avoid a large, once-off hit, he told finweek.

Amid this gloom, and global markets having lost trillions of dollars in investment value, there are a few stocks that may survive the slump a little less damaged than others.

“Cash is king in situations like these,” Kathy Davey, fund manager at Ashburton Investments, told finweek.“We have gone more defensive.”

Engelbrecht shares the sentiment that in testing times like these, those companies with the strongest balance sheets – or those with the most cash on hand – will be better equipped to weather the storm.

Global stocks

An example of a company with a healthy cash balance is Warren Buffett’s Berkshire Hathaway. It sat on a cash pile – which includes investments in short-term US Treasury bills – of almost $128bn at the end of December, according to its annual report for 2019.

This places Berkshire in a prime position to buy large stakes in prime companies such as Microsoft, which it viewed as too dearly valued in the past, says Davey. Microsoft slid from a 52-week closing high of $188.70 on 10 February to $135.42 on 17 March – a decline of 28.2% in five weeks. In a note to clients, Davey highlighted four international stocks that may navigate the turbulence better than others.

And most of them are consumer defensive stocks. The 135-year-old Johnson & Johnson “has grown to become the largest, most diversified healthcare giant globally with operations in virtually all countries in the world”, she wrote.

Pharmaceutical products contribute 51% to its revenue and 58% to its profit, medical devices comprise 32% of revenue and 32% of profit, and consumer healthcare (including sanitary products, which are in high demand during the crisis) delivers 17% of revenue and 10% of profit, according to Davey’s calculations.

“Johnson & Johnson is ideally placed to benefit from medical demands of an ageing demographic as people tend to live longer,” she wrote. Davey told finweek that Reckitt Benckiser – the maker of Dettol and Nurofen; and Procter & Gamble – which produces Vicks, may also benefit as the coronavirus pandemic continues.

Where people are stuck in their homes, companies such as Netflix – the streaming television network – may benefit, says Engelbrecht. He also mentions that online retailer Amazon stands to benefit as people steer clear of bricks-and-mortar shops and rather buy their goods online. “This might be the event that forces people to join or adapt to the new (digital) economy,” says Engelbrecht. “It might change the way in which enterprises do business.”

The demand for Amazon’s products led to the company saying on 16 March that it plans to hire an additional 100 000 part- and full-time staff in the US.

Local stocks

Even in the local environment, those listed companies facing consumers directly and selling essential goods and services would probably be more resilient than others.

“Naspers* is well-positioned with its stake in Tencent,” says Engelbrecht. “It is also noteworthy that activity on Tencent – including games – was tracked as a proxy in China to determine when productivity would start to increase after the coronavirus outbreak. ”Clicks and Dis-Chem are two other stocks that may ride the wave less scathed than others. “They are in a good position given that their stock levels hold up,” says Engelbrecht.

With regard to grocers such as Shoprite, Pick n Pay, Spar and Massmart, Engelbrecht says he’s on the sidelines for now. “We don’t know whether people who are stockpiling now are expediting their eventual purchases or whether these are additional to future purchases.”

And the losers?

Not all companies are equal as the pandemic straddles the planet. “We are very selective on which financial companies we have exposure to and have constructed our portfolio to be underweight financial companies in a low-growth and low-interest-rate environment,” says Davey. Interest rates have been lowered in the rest of the world in response to anticipated lower economic growth (read cover story here).

Locally, a lower interest rate environment will shrink the banks’ margins as the monetary policy committee pulls out the stops to kickstart the economy – on 19 March the monetary policy committee cut interest rates by 100 basis points. In addition, Engelbrecht says that those companies that rely on foot traffic will likely suffer the most. “Those companies selling durable products such as televisions, and car dealerships will likely be impacted,” he says.

He mentions that at the height of the coronavirus outbreak in China, there was one week in which almost not a single car was sold.

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the 2 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.


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