Hamish Tadgell
The havoc in stock markets in the March quarter from COVID-19 was on a scale rarely seen, with the economic fallout likely to expose vulnerabilities and growing bifurcation in sector and company performance, according to SG Hiscock & Company portfolio manager, Hamish Tadgell.
Mr Tadgell believes businesses exposed to infrastructure spending and financing, essential goods and services, health and aged care, and data connectivity and information technology will be the likely beneficiaries of the post Coronavirus environment.
“When the virus itself starts to recede and the economy reopens, we expect to emerge into a world that has changed in many respects. The fact that most people are working from home and education has largely moved online means IT, data and connectivity have never been more important. If you hadn’t heard of Zoom six weeks ago, you almost certainly have now and are possibly using the service almost daily.
“Conversely, following three decades of uninterrupted growth in Australia, and given the rise in household debt levels and house prices, the risk of deleveraging however is now a reality. Consumer-facing sectors, including discretionary retail, tourism and leisure, are likely to face tougher times ahead,” he said.
Mr Tadgell said sectors and businesses exposed to the following areas that may appeal to investors seeking to reposition their portfolios include:
- Infrastructure spending and financing – initial government fiscal stimulus measures have focused on building a bridge to save jobs and businesses. The next phase is likely to be on job creation and Private Public Partnerships
- Essential goods and services – non discretionary goods will continue to attract demand. Leading manufacturers and suppliers in this space will likely cement their position and take share from weaker players
- Health and aged care – this will remain supported by strong underlying demographic trends, particularly the aging population through the burgeoning Baby Boomer segment.
If the recession is short-lived and economic activity rebounds strongly over the coming two quarters, then the current opportunity for buying stocks looks good, according to Mr Tadgell.
“But there is currently no way to make a prediction about this with conviction given the prevailing uncertainty. The fact that such events cannot be precisely defined and measured, and statistical and probability analysis cannot deal with them, is what leads to radical uncertainty, and explains why markets are in their current funk.
“Being too early can be as bad as being too late, with the risk things can stay volatile and the bottoming drawn-out. There is a need, however, to have an action plan and ensure, as Winston Churchill said, we ‘never waste a good crisis’, and capitalise on being greedy when others are fearful,” he said.
The continuing market volatility is among the highest on record and is likely to continue for some time. The global financial system has taken a big hit, even more damaging than the GFC, as it affects nearly every industry. The leverage in the financial system and sharp increase in ETFs and risk parity strategy volumes exacerbated the speed and extent of the market’s decline, with many investors forced to sell due to financial leverage, margin calls and portfolio redemptions.
“The sharp sell-off in the market throughout March means almost every company is on sale, and provides the opportunity to upgrade portfolios with quality companies that have previously screened well, but fallen down on valuation and lacked the required margin of safety.
“Those with a degree of connectedness to infrastructure, essential goods and services, health and aged care, and IT are in a far better position to capitalise on a changed way of life than those with a heavy reliance on more discretionary consumer spending,” he said.
