Summary

• The global equity market declined largely due to concerns over the spread of the Coronavirus. The operations of the portfolio’s holdings have to date been relatively un-impacted. One exception however is sportswear manufacturer Shenzhou
• Anecdotal reports indicate that Chinese manufacturing has begun to improve from a low base. However Government efforts elsewhere to reduce the spread of the virus are set to reduce economic activity
• The Global Equity Growth model portfolio declined 5.9% over the month which was 2.1% ahead of the global index
• At the end of the month and thereafter Global central banks indicated a willingness to support economies through short term turbulence that the Coronavirus may produce.

Market update

Efforts to contain the spread of the Coronavirus further lowered expectations for economic growth and sparked fear in financial markets. The Global Equity Income model portfolio declined 5.9% over the month. While this performance was 2.1% ahead of the global market the team does not enjoy delivering negative returns. As we wrote last month the operations of most portfolio holdings are relatively well immunised from the effects of the virus. The speed of equity market decline was rapid and saw mega capitalisation stocks somewhat more severely impacted than smaller companies. This was likely due to withdrawals from passive funds which sell stocks regardless of underlying valuations and growth prospects.

Relative outperformance came largely as a result of sector allocations in particular avoiding holdings in the oil sector, however the portfolio also benefited from strong stock selection in the consumer sector. Chinese sportswear manufacturer Shenzhou has been directly impacted by the coronavirus. The shares fell 7% during the month. The company’s operations are now reportedly back to 90% of pre-virus production levels.

The holding in Check Point was sold. The team was concerned that management’s focus on cash generation was resulting in reduced investment that was to the detriment of the firm’s long run market position.

From a historical perspective, the world is overdue a nasty pandemic. At the moment this is not it. While there is a chance that this evolves to be that, the pathogenicity of Coronavirus is relatively mild so far. Concerted efforts by governments to reduce the spread of the virus are however reducing economic growth.

Equity markets typically see through temporary earnings impacts such as this relatively quickly so recognising that such sell offs present an entry opportunity is key. Are we at the trough of the sell off?

Historically for both Ebola and SARS virus we can observe in hindsight that the bottom picking of share prices occurred at peak negative news. Also historically when the World Health Organisation announces a pandemic, stock market reaction has tended to be large. Our belief was that the Chinese were underreporting numbers of cases and this has been borne out.  An important issue now is if other countries will successfully contain the small number of cases they have. We are monitoring some interesting companies with large current direct exposures to the virus. We remain unsure that we’re at peak negative sentiment. To date we have been somewhat surprised by the relatively small share price moves of some of these companies, especially relative to those observed for some quality, mega capitalisation stocks whose operations have seen minimal impacts.

Market turmoil often produces opportunities for long term investors to pick up assets at much reduced prices. The portfolio continues to hold elevated levels of cash which the team is looking to deploy. Around the end of the month central banks indicated their intention to support financial markets. This will most likely come in the form of further interest rate cuts and increases in quantitative easing.