News of coronavirus (COVID-19) in recent weeks has contributed to increased market volatility. In this piece, Dale Nicholls explains how he’s been navigating markets and shares his outlook for the coming months.
New cases of coronavirus (COVID-19) have fallen significantly in China and it’s clear that the Chinese government’s efforts to curtail the outbreak has been succeeding. I would note that there has been a significant short-term impact, in particular, on travel & tourism-related sectors, which will see revenues negatively impacted.
While it is extremely challenging to estimate the specific impact of the outbreak immediately, it is also important to draw attention to the substantial steps Chinese government and policymakers have taken to contain the outbreak as well as provide support to economic activity. As soon as the Chinese markets opened on 3rd February, policymakers infused liquidity and lowered the short-term repo rates.
Since, they have also implemented various other measures such as cutting tax rates and fees to support smaller businesses and asking banks to support troubled companies by lowering interest rates and rolling over loans. I expect further stimulus - both monetary and fiscal - and with lower global interest rates being put in place to support economic growth, China has the capacity to ease further (also worth seeing whether President Xi will keep China’s 2020 growth target in place).
Whilst the short-term impact from the virus is notable, it does not derail the structural shifts underway in the region. I remain cautious, as it is difficult to predict the extent and time this will last for, however if we see signs of the virus being contained then this impact could be short lived as sentiment and demand would improve quickly. This should result in interesting opportunities to purchase structural long-term winners at attractive valuations in sectors like technology, where there are a number of global leaders.
I have been reviewing beneficiaries of potential stimulus and paying attention to companies that I expect to be able to navigate and emerge stronger through this period. I have also been raising exposure to names where more attractive liquidity opportunities have appeared as a result of the markets’ moves. Notably in select consumer staples, discretionary and insurance names. I have also been reducing financials, given that credit cycle dynamics are deteriorating and some industrials exposure, especially where it is more global. The protection strategies (via index puts) are coming into play, which in turn has seen the portfolio’s net exposure fall to below 116.
All up, I invest in companies with good long-term growth prospects that are cash generative and have strong management teams. These include companies that have carved a niche for themselves in the segments they operate in, and often offer an intersection of technological leadership and strong consumption outlook. I also maintain a belief that premiumization in consumption within individual categories will continue.
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