Summary 

• The actions of governments to reduce the humanitarian impact of the very rapid spread of Coronavirus is leading to a huge, though likely temporary, reduction in economic activity. During March this led to a major risk off environment and very substantial falls in equity markets. The prices of consumer staples and healthcare stocks held up relatively better than the market
• A barrage of supportive measures by central banks and governments has been made in order to try and cushion companies and consumers from a deep, but hopefully short-lived, recession
• The Ashburton Global Leaders Portfolios declined 8.4% during March in comparison to the Global Index decline of 13.5%.

Market update

The very rapid spread of the Coronavirus (COVID-19), declared a pandemic on 11 March 11 by the World Health Organisation, is resulting in human tragedy across the world. Our thoughts are with all those impacted by the loss of family and friends. The team has relatives in some of the highest risk categories and naturally this causes our families much concern. We do, however, take some comfort in the relatively low risk the virus poses to most of the world’s population in comparison to other major diseases.

Efforts to control the spread of the virus are resulting in substantial reductions in economic growth. A deep recession is now unavoidable. United States (US) jobless claims have spiked to ten-fold the peak of the financial crisis. Certain sectors have been much more heavily impacted than others. Reductions in international travel for instance have serious repercussions on the airline, travel, leisure and hospitality industries. The Ashburton Global Leaders portfolios do not have exposure to these areas.

The oil sector too has been impacted significantly. Under normal circumstances aviation fuel accounts for roughly six percent of daily usage, and reductions in economic activity have led to a demand shock. Literally adding fuel to this fire, a major disagreement between OPEC and Russia over proposed supply cuts saw oil prices plunge further, before bottoming below $20 bbl.  While this will be particularly negative for energy companies, as well as oil exporting countries, it will provide some of the ingredients for economic recovery going forward, especially if prices remain below $25 for a number of months.  The MSCI World Energy Sector Index is down over 45% year to date.  There are several reasons to expect the low oil price to reverse. These include a recovery in demand, higher cost production permanently leaving the market, and major oil producers coming to agreements on production cuts given that lower prices are bad for budgets of oil producing countries. During the month the position in Shell was added to at a share price not seen since the mid-1990s.

Perhaps unsurprisingly given the market moves trading activity was elevated. A new position was added in Chinese insurance giant Ping An. Ping An shares have suffered in the market sell off and the company is well positioned to continue to benefit from the rise in wealth amongst the Chinese. Ping An has a strong technology underpin which enables online insurance sales, a vigorous health focus and is continuously innovating which we find very exciting over the longer term. Having been the first to suffer from Coronavirus, we believe that the Chinese economy will most likely recover ahead of much of the rest of the world.

The position in drinks company Diageo was exited. With around 15% of revenues being associated with international travel and lock-downs predicted to severely impact sales we believed that this was prudent with opportunities available elsewhere providing a better balance of upside and risk. Overall cash levels were reduced with top ups made of Microsoft, Reckitt Benckiser, Nestle, NXP Semiconductor and Blackrock. Meanwhile JP Morgan, Visa and Alphabet were trimmed.

Many businesses will not cope with a period of such severe economic reduction. Governments and central banks have unleashed a barrage of measures to help support society and businesses. While monetary policy stimulus will do little to ease consumers’ plight, fiscal stimulus to provide support for individuals as well as corporates is also on its way, with the US Congress approving a fiscal stimulus of over $2 trillion, representing almost 10% of gross domestic product (GDP).  We seek to avoid investing in businesses reliant on support and potentially in need of future non-expansionary capital. While the economic valley is deep our central case is for the economy to improve fairly rapidly after isolation efforts end. Getting back to normality may be enabled by the roll out of antibody testing and the knowledge of those not at risk of Coronavirus infection due to immunity.

Many dark clouds have silver linings. Times of adversity can be wonderful for innovation. Pollution levels have plummeted. Businesses and home working policies will find efficiencies. For long term investors, they also provide opportunities to buy shares of companies at much reduced prices. Our team has conducted deep reviews of the impacts of the virus on the underlying operations of each of our holdings and how their business will be positioned once the recovery begins. Inevitably, the greatest share price gains will initially come from some of the most highly leveraged more risky businesses, but peers of these sorts of companies may also fail. Our philosophy is to avoid opportunities for permanent capital loss and rather invest in shares of well capitalised companies that compound their intrinsic value over time.