April 2, 2020: Live from the desk of our CIO, Piers Bolger

April 2, 2020: Live from the desk of our CIO, Piers Bolger

April 2, 2020: Live from the desk of our CIO, Piers Bolger 150 150 Piers Bolger

We’re now through March, which obviously saw a very significant decline in equity markets and a really challenging period for investors. The ongoing spread of the Coronavirus and the response that we’ve seen to date, which has resulted really in significant lockdowns in every country around the world, has clearly had a big impact on financial markets.

Today we thought we’d address two questions: Is there any light at the end of the tunnel? Do we think that there are some opportunities in what has been a really difficult market environment? We thought we would share a couple of points around that and give you some perspectives on our view that we certainly do believe that there is light at the end of the tunnel. It might be still a little while away, but it doesn’t necessarily mean that investors should be forgoing the opportunity that he’s presented when you do see such a significant fall in equity markets.

Chinese composite PMIThe first slide gives you a bit of a snapshot on China. This chart reflects the manufacturing side of the Chinese economy, both in terms of services as well as industrial activity. You can see that sharp decline through February, in fact it was the largest single month decline ever seen in the Chinese economy. Prior to that,the PMI indices looked relatively stable.The important point to note is that above 50 means that the economy is expanding and below that is a contractionary aspect associated with the economy. You can see clearly in February that moved into a big negative in terms of the contractionary phase. That was to be expected when you think about the extent of the lockdown and Wuhan being a significant industrial center for China. Through March though we saw a great rebound as China got on top of the Coronavirus. We started to see stabilisation rates and the rate of spread actually decline. China was able to reopen up its economy and now we’re probably looking at China somewhere in the 80% range in terms of where they were prior to locking down the economy. But notwithstanding that, we have seen obviously a significant decline globally.

Chinese exportsSo when you compare that chart there to the second chart, you can see that export markets remain relatively constrained, with China being the export engine of the world in terms of manufacturing. You can see in the context of a similar chart just looking at the export side of the Chinese economy, it’s still in a contractionary phase. So there’s still a lot of excess capacity in China in our view and will continuing to be there for an extended period as the rest of the world really needs to play catch up in order for that growth to start to kicking.

So what does that mean if you’re an investor? Does that mean that you run to the hills and you forgo the opportunities of depressed market prices across certain certain sectors and individual companies. In our view that’s not the case. We’ve always taken the view that you should be thinking about not only what’s occurring here and now, but equally thinking about the opportunities that you can create from the falls that we’re seeing in equity markets. Clearly, we think that what we’re seeing at the moment is going to continue for some time. So one of the approaches that we have been taking in terms of that has been averaging into our position. So rather than investing everything we’ve got now, we’ve been moderating our approach to investing into either new positions or adding to existing positions where we’ve got a high conviction in.

I just thought I’d share with you a couple of those companies, both for our large cap Australian equity portfolio as well as our small to big cap portfolio.

Infinity core portfolioThis slide is just a reflection of our large cap portfolio. There are a couple of names that I want to bring to your attention where we believe that there is certainly opportunity, not only now but more importantly going into the future. The first one of those is BHP. As you it’s the largest mining company in the world. When we think about BHP, clearly it’s a commodity driven company. It’s main production is iron ore and that’s obviously used in making steel. So when you think about the importance of steel in the context of global economic growth and economic activity, and one of our biggest buyers of that iron ore is China. So when positioning our portfolio we’re not really thinking about that side of it, but as we expect and as we continue to believe that the demand for iron ore will increase as we move through these phase, particularly as we think about the ongoing growth that we’re expecting to see on the back of this we think that BHP will be a natural beneficiary of that through its iron ore. But more importantly, BHP also mines another couple of important minerals. It mines copper, which is used not only in industrial production but equally just the importance of that in regards to electric vehicles, as an example. We believe certainly through the context of the evolution of what we’re going to see on the industrial landscape that copper is going to become an increasingly important metal going forward.   So when we think about the context of BHP, we think there is significant upside from that business as the recovery takes hold. We don’t believe that we’re seeing prices whether it be for iron ore or oil, will continue to be as depressed as where they are today. So BHP as a theme for us, is not only the diversified nature of it but it’s also a long term thing in terms of what can be delivered on the upside.

Another company is CSL. Health care is a theme thatwe’ve been significantly overweight for a number of years now. We really like the thematic around health care and Australia’s been blessed to have a number of leading health care companies and CSL is clearly one of them. CSL dealing into blood plasma, but equally in the development of vaccines and other drugs related to the healthcare industry. The way that they’re able to execute on that, and particularly in the environment we’re in, we believe CSL is going to continue to deliver that growth. It’s got a very significant global footprint which continues to grow and it’s a market leader in its field. So not only is that a stock for today in terms of dealing as a defensive nature within a portfolio, we believe there is certainly significant growth as well in CSL going forward.

The other business is Goodman Group. Goodman really plays into our IT and eCommerce theme. Certainly coming out of this, we think that the retail landscape is going to change materially. We think the way individuals shop is going to change materially and we certainly believe that Goodman’s going to be a natural beneficiary of that. Particularly in terms of their big box, their industrial warehousing for distribution centres built around eCommerce as an example. We think Goodman can really take that growth that they’ve had in more recent times and continue on with that going forward. Even as a defensive positioning today, we believe that Goodman is really well positioned.

On the other side of that chart you can see our central positions. You can clearly see the divergence between healthcare and our financials position. We’ve continued to be underweight in the retail banks. As many of you would know, we feel that the retail banks are looking challenged in their outlook for earnings growth over the medium term. It doesn’t mean we don’t have exposure to them, but we certainly don’t see the growth in that part of the market as significant as what we can see in other sectors where be it materials, broad based industrials, healthcare and IT, for example. So we have been moderating our position there. Where we do like our exposure to financials, companies such as Magellan Group, which we believe is going to be very linked to the upswing in equity markets through time. We think it’s a really good business. It not only has a very strong capability in global equities, but also in other asset classes, whether it be infrastructure and Australian equities to a lesser extent. So the growth optionality with a group like Magellan Group and also with Macquarie Group, in terms of financials we believe is brighter than traditional retail banks.

Infinity SMID portfolio

We then move to our small to mid cap portfolio and those themes start to play through as well. The biggest thing that you can say in that portfolio is our position in IT. The IT side of our portfolio is really built around the thematic that we believe Software as a Service (or SaaS as it’s known) is going to continue to grow in importance. The way we’re interacting at the moment, with regards to the delivery of our videos as an example, is that a lot more is going to happen outside the office going forward. We think that’s a theme that a lot of Australian companies have been able to to deliver on.

So if you just look at our a position there in NexDC. NexDC is an infrastructure play for data. It provides boxes effectively for companies to be able to store computing which enables them to be able to store data within a secure environment. Cloud computing and the like is a really important part in their ability to be able to do that for businesses and be able to provide the connectivity for businesses around data warehousing is fantastic. We think as a business it’s going to be a big winner out of the changes to the way not only businesses but consumers think about operating going forward.

Another business that we have in that portfolio is Tyro Payments. Tyro is a financial payments business that sits somewhere between financial and IT. When you go and pay for your coffee, if you can still get one at the moment, you’ll tap with your card and there’s a very good chance that the cafe or the restaurant uses Tyro payment facilities.

Again, we believe it’s a really high quality growth business. Clearly, we’re seeing a slowdown in discretionary spend at the moment, but when we think about the opportunity for that business, particularly because it owns its own software and the development that sits within that, we believe there is significant opportunity for a business like Tyro.

So when we look at that from a context of overall portfolios, we think that there is not only businesses today that can manage through the challenges that we’re seeing in regards to financial markets, but there are certainly businesses that we’re continuing to add to that we believe will only take advantage of what’s occurring today, but equally and more importantly, are well-positioned for growth.

This gives you a quick snapshot on our thoughts on portfolios. Market conditions are difficult, but it doesn’t mean from an investor’s point of view that you don’t take some of those opportunities that are presented in difficult market environments and really double down on your higher conviction plays but equally, think about how you can then build portfolios for the future. That’s exactly what we’re doing here at Viridian. As always, if you have any concerns, please reach out to your advisor.

Piers Bolger is Chief Investment Officer at Viridian Advisory

This post and some supporting materials may be regarded as general advice. That is, your personal objectives, needs or financial situations were not taken into account when preparing this information. Accordingly, you should consider the appropriateness of any general advice we may have given you, having regard to your own objectives, financial situation and needs before acting on it.  Where the information relates to a particular financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product.
The material in this post is correct and complete as of the data it was posted.  Viridian is not responsible for, and expressly disclaims all liability for, damages of any kind arising out of use, reference to, or reliance on any information contained within this site.