6 key themes for the market’s next phase
Investors are hopeful, says Geoff Wilson AO, but that doesn’t fill him with confidence. “‘Hope’ is not a strategy, but that’s where I think we are,” he told investors in his interview for the WAM Vault, a digital replacement for their usual half-yearly roadshow. After the falls in February and March, the bounce since then has been “because of the phenomenal liquidity that’s being pumped into the system,” he said.
Wilson believes there’s more pain to come. The longest bull market in history is unlikely to be followed by the shortest bear market in history. But in the short term, ‘fighting the Fed’ seems to be a dangerous game. Oscar Oberg , Lead Portfolio Manager for WAM Capital, WAM Active, and WAM Microcap explained that central bank and government support should help markets in the short term.
“I’m probably bullish in the short-term. I think social distancing has worked, which is the first tick. We’ve shown that in Australia. There’s just a flood of central bank and government support coming into economies and that’ll help the market. We’re spending as much as we did as a percentage of GDP, coming out of the Second World War, today. It’s just an incredible amount of quantitative easing and money that’s going into the system, coupled with 0% interest rates. That’s a good environment for the market, at least in the short-term.” - Oscar Oberg
So with such a mixed outlook, how can investors position for the environment? The three Lead Portfolio Managers; Oscar Oberg, Catriona Burns, and Matthew Haupt outlined six different themes for today’s market in their presentations.
1. Online retail
With most non-essential retail closed in many countries, it should come as no surprise that online retail is booming. Even where the shopfronts are open, social distancing measure can mean long wait times and reduced foot traffic for stores. Oberg pointed to Temple and Webster (TPW) and Kogan (KGN) as outperformers in their categories. However, he sees more value in Adairs (ADH) and CityChic (CCX), both of which have high proportions of their sales online.
2. Cloud computing and digital infrastructure
Another beneficiary of people being stuck at home is the cloud computing industry. Whether it’s data centres or distributors, they’re likely to benefit from positive structural changes. Oberg identified NEXTDC (NXT), Megaport (MP1), Data#3 (DTL), and Dicker Data (DDR) as companies riding this tailwind.
Catriona Burns sees healthcare performing well over the next year. Valuations are attractive on a relative basis, and certain parts of the sector – for example, med tech, and pharmaceuticals – the businesses are set to perform well. She does warn however, that healthcare is not a homogenous group. Some parts of the sector are struggling to adjust their businesses, like hospitals, for example.
4. Discount retailers
Another area that she expects to perform well are discount retailers, as consumers become thriftier and pay close attention to where they’re spending their money. They’ve been buying some of the biggest operators across the developed world, including Dollar General (NYSE: DG), B&M Value Retail (LON: BME), and Kobe Bussan (TYO: 3038).
“We think they are plays on that thematic of inevitable thriftiness that comes through from consumers in the world post-coronavirus.” - Catriona Burns
For Matthew Haupt, oil is the big thematic right now. A fall of about 20% in global oil consumption has resulted in a glut of oil sitting in storage and tankers. Prices for tanker hire have jumped 300% as the industry scrambles to find a way to store unused oil. Haupt expects the economy to improve, and as it improves, oil usage will go up. With OPEC having cut approx. 10% of its daily production, a recovering global economy should see some of these shortages begin to clear.
Beyond this, US shale production is economical and some companies have already gone bankrupt. US shale production could see another 4-6% of global production disappear.
“You could be in a position where the oil market becomes incredibly tight and you actually get prices rising. And I don’t think people have got 50, 60 dollar oil in the current valuations of some of the Australian oil companies.” - Matthew Haupt
Santos (STO) is the biggest oil position in his portfolio as it provides more leverage to a recovering oil price than Woodside (WPL). However, he says they “quite like that companies too” due to its stability and development pipeline.
6. Potential shortage of US Dollars
This one is more of a risk than an opportunity; Haupt warns that there could be a shortage of US Dollars that could spell trouble for commodities producers. At this stage, it’s one that he’s just watching, not acting on.
At the start of this crisis, there was a major shortage in US dollars. The US dollar is the primary instrument for trade. Emerging markets sell goods to the US for dollars, but as trade dried up, nobody could get US dollar, but everyone wanted them.
If economic conditions worsen again and the supply of US dollars disappears, emerging markets will be unable to pay their debts, which are generally priced in US dollars.
“If we see evidence of this happening, we will have to adjust our positioning.” - Matthew Haupt
Which letter of the alphabet is this?
Much time has been spent opining in recent months on whether we face a “V”, a “U”, a “W”, or an “L”. Whatever the shape, Geoff Wilson says it could take longer than people expect. As such, he remains conservatively positioned.
“What I’ve learned over time, whether it’s the ‘87 crash or the GFC is, you’re better off erring on the side of caution.” - Geoff Wilson
In the end, he says the best approach is to “plan for the worst and hope for the best.”
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Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.
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