in depth xxxxxxxxxxxxxxxx markets By Jaco Visser
WINNERS IN THE ROUT
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As market volatility continues, certain local and global defensive stocks are starting to pose attractive valuations.
sking investment managers which stocks may pose value as the coronavirus rips through world markets and forces economies around the globe to their knees, may sound premature. But specks of light are starting to emerge amid the darkness of one of the world’s largest sell-offs in generations. “There is a caveat,” warns Stephán Engelbrecht, fund manager at Anchor Capital. “If this virus continues after Easter weekend, there will be a real impact through job losses, insolvencies and economic contraction.” The best outcome for the economy and markets in general is for the spread of the virus to be flattened out over a longer term – or, in other words, to slow the spread of contamination and avoid a large, once-off hit, he told finweek. Amid this gloom, and global markets having lost trillions of dollars in investment value, there are a few stocks that may survive the slump a little less damaged than others. “Cash is king in situations like these,” Kathy Davey, fund manager at Ashburton Investments, told finweek. “We have gone more defensive.” Engelbrecht shares the sentiment that in testing times like these, those companies with the strongest balance sheets – or those with the most cash on hand – will be better equipped to weather the storm.
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Global stocks
An example of a company with a healthy cash balance is Warren Buffett’s Berkshire Hathaway. It sat on a cash pile – which includes investments in short-term US Treasury bills – of almost $128bn at the end of December, according to its annual report for 2019. This places Berkshire in a prime position to buy large stakes in prime companies such as Microsoft, which it viewed as too dearly valued in the past, says Davey. Microsoft slid from a 52-week closing high of $188.70 on 10 February to $135.42 on 17 March – a decline of 28.2% in five weeks. In a note to clients, Davey highlighted 32
finweek 2 April 2020
four international stocks that may “Naspers* is well-positioned with its navigate the turbulence better than stake in Tencent,” says Engelbrecht. “It is others. And most of them are consumer also noteworthy that activity on Tencent – defensive stocks. including games – was tracked as a proxy in The 135-year-old Johnson China to determine when productivity & Johnson “has grown to would start to increase after the become the largest, most coronavirus outbreak.” diversified healthcare giant Clicks and Dis-Chem are two globally with operations in other stocks that may ride the virtually all countries in the wave less scathed than others. world”, she wrote. “They are in a good position Pharmaceutical products given that their stock levels hold contribute 51% to its revenue up,” says Engelbrecht. Kathy Davey and 58% to its profit, medical With regard to grocers such Fund manager at Ashburton Investments devices comprise 32% of as Shoprite, Pick n Pay, Spar and revenue and 32% of profit, and Massmart, Engelbrecht says he’s consumer healthcare (including sanitary on the sidelines for now. “We don’t know products, which are in high demand during whether people who are stockpiling now the crisis) delivers 17% of revenue and 10% are expediting their eventual purchases of profit, according to Davey’s calculations. or whether these are additional to future “Johnson & Johnson is ideally placed purchases.” to benefit from medical demands of an ageing demographic as people tend to live And the losers? longer,” she wrote. Not all companies are equal as the Davey told finweek that Reckitt pandemic straddles the planet. Benckiser – the maker of Dettol and “We are very selective on which Nurofen; and Procter & Gamble – which financial companies we have exposure produces Vicks, may also benefit as the to and have constructed our portfolio coronavirus pandemic continues. to be underweight financial companies Where people are stuck in their in a low-growth and low-interest-rate homes, companies such as Netflix – the environment,” says Davey. streaming television network – may Interest rates have been lowered in the benefit, says Engelbrecht. rest of the world in response to anticipated He also mentions that online retailer lower economic growth (see cover story Amazon stands to benefit as people steer on p.28). Locally, a lower interest rate clear of bricks-and-mortar shops and rather environment will shrink the banks’ margins buy their goods online. as the monetary policy committee pulls out “This might be the event that forces the stops to kickstart the economy – on 19 people to join or adapt to the new (digital) March the monetary policy committee cut economy,” says Engelbrecht. “It might interest rates by 100 basis points. change the way in which enterprises In addition, Engelbrecht says that do business.” The demand for Amazon’s those companies that rely on foot products led to the company saying on traffic will likely suffer the most. “Those 16 March that it plans to hire an additional companies selling durable products such 100 000 part- and full-time staff in the US. as televisions, and car dealerships will likely be impacted,” he says. He mentions Local stocks that at the height of the coronavirus Even in the local environment, those listed outbreak in China, there was one week in companies facing consumers directly and which almost not a single car was sold. ■ selling essential goods and services would editorial@finweek.co.za *finweek is a publication of Media24, a subsidiary of Naspers. probably be more resilient than others. www.fin24.com/finweek
