From an economic point of view the length of time that isolation measures need to remain in place is of critical importance. We will start off with a very brief review of our understanding of the current situation. This contains a large measure of uncertainty as epidemiologists are currently unsure of the path of the virus and thus a wide margin for error needs to be applied. We will then review of some of the more important industry and company situations; this will be dealt with in more detail in the Quarterly Reports which will be sent by the end of this month.

The reported rate of new infection in developed Asian countries has remained low for the last week, as it was in the prior week. In Europe there are some signs that countries that were infected early, such as Italy, are starting to see moderation in the rate of new infection, but levels remain high. However, those where infection appeared later, such as Spain, are still experiencing increasing numbers of new infections. In the US the number of new infections is increasing and is at a high rate. Actions taken to bring the virus under control have been least effective there and as a result the infection and death rate are the highest experienced of any country so far. Australia is showing a decreasing rate of new infection, although medical authorities are still very cautious about the trajectory of infection rates. No meaningful data is available for emerging countries and great concern should be felt for their circumstance.

Over the last two weeks companies have been updating markets. Comments have by necessity been somewhat vague as little can be said definitively about earnings and a large number have withdrawn guidance. We would like to focus more on financial positions rather than near term earnings. Emerging from this period in a position to take advantage of opportunities we think is more important than speculation about the near term. We would like to start with the stocks and industries that the markets have the greatest concerns (correctly or otherwise) as indicated by the size of share price falls:

Banking Sector

The largest fall and concern, understandably, has been in the banking sector. The sector went into this crisis with strong capital and liquidity positions and high quality lending books (among the banks held in portfolios) and they are far better equipped to deal with the upcoming strains than in the 2008 crisis when their situation was mostly the complete reverse. The strains will be significant without doubt, but government liquidity support for their customers is also very significant. At this stage we would not expect the bank stocks we hold to have to go to the market for significant additional capital. This period will be a meaningful test of the concept of “unquestionably strong” which regulators applied to banks post 2008.

Retail

No exposure other than Woolworths and Elders, both of which have fared well in this period for different reasons, both are financially very comfortable and we do not have concerns.

Manufacturing

The companies held went into this period in strong financial positions. The high fixed cost have a negative effect on cashflows which is a concern the longer economic activity is very depressed and we are looking to position the portfolios for an uneven recovery.

Healthcare, Consumer staples, Telcos, Media and Technology

The stocks we hold in these sectors we are not too concerned about, the share prices have come down significantly less than the market and their revenues have been less effected. In the case of telcos their products are in very high demand!

The share price falls have produced some opportunities in stocks we have previously thought too expensive and we feel this will allow us to improve the underlying quality of the portfolio companies at significantly less cost than would have been the case in the past few years.
Should you have any questions please do not hesitate to contact us on (02) 8256 3777, or individually as per below.

 

Hugh MacNally, Executive Chairman: 0414 728 638
Peter Reed, Portfolio Manager & Director: 0455 455 277
Jill May, Senior Client Relationship Manager: 0412 033 359

Hope you are in good health.

Kind Regards,

Hugh MacNally
Executive Chairman,
Private Portfolio Managers Pty Ltd