Defence, defence, defence
Last week, Wilson Asset Management hosted their 2020 investor conference call. Chairman and CIO, Geoff Wilson used the opportunity to talk about market volatility, and how the lead portfolio managers are restructuring their portfolios in this time of uncertainty. Geoff is confident that the impact COVID-19 has had on the market is incredibly significant.
“There’s a high probability we’re going to have recessions globally.”
Three of Wilson Asset Management’s lead portfolio managers, Catriona Burns, Oscar Oberg and Matthew Haupt were asked how COVID-19 will impact their portfolio and their best stock pick for this volatile time.
Lead portfolio manager Catriona Burns has felt the wrath of COVID-19 more than most as she tries to return home after travelling to the USA and Europe. Despite this, she gathered insight into the American and European reaction to the virus, saying there is significant uncertainty about company’s operations and earnings. Particularly in the USA, tech and payment stocks have adapted well to the current climate and healthcare is upbeat, but all other sectors are suffering. Catriona says that globally, the coronavirus will be a massive hit to the GDP in the long term and recovery will not come easily.
How will you position the portfolio as a consequence of COVID-19?
Catriona acknowledged that, given the global market is so volatile, significant changes had to be made to the portfolio. LVMH, a substantial holding, was sold with the announcement of the outbreak of COVID-19 as less people are inclined to purchase luxury goods. Booking.com was also sold given travel bans, and the fund reduced weightings in more cyclical stocks including AMEX and Airbus.
Catriona tilted the portfolio more defensively to companies that benefit from volatility and that could withstand the effects of the virus. Some defensive inclusions were Nomad Foods, CME Group and TransUnion.
What is one stock you really like right now?
One stock that Catriona has increased within the portfolio is Nomad Foods. It is the largest European frozen foods company. This is an ideal stock to own at the moment given the demand for non-perishable goods. The small cap trades at a big discount and has a strong balance sheet, according to Catriona.
Lead portfolio manager Oscar Oberg similarly observed the significance of COVID-19 on companies, claiming this was the weakest reporting season since the GFC. Despite rate cuts by the RBA, he is pessimistic about the housing market in the coming months and has consequently reduced the exposure to housing in the portfolio.
How do you have your portfolio positioned amongst the volatility of COVID-19?
Oscar Oberg notes that increasing cash was essential following the outbreak of the virus.
The most important revision to the portfolio revolved around liquidity, particularly when constructing a portfolio consisting mainly of small to mid-caps. Throughout the volatile period, the portfolio will be constructed of larger companies that are highly liquid. Microcaps will all be sold and companies with minimal exposure will be attained. Some sectors with minimal exposure that have been added to the portfolio include telecommunications and insurance broking.
Similarly, cyclical stocks were sold-off, particularly in sectors including mining and retail.
What is one stock that looks good to you at the moment?
One stock that looks good to Oscar is Johns LYNG Group (JLG). The company specializes in emergency relief equipment for buildings following natural disasters including bushfires, floods and hail. The recent Australian natural disasters have provided an ongoing pipeline of work for JLG for the next two to three years.
According to Oscar, they’ve got a strong balance sheet with no debt. They have a price to earnings ratio of 20 times and are predicted to grow in excess of 20% per annum over the next few years.
Talking all things large caps, Matthew Haupt is shying away from the mining sector. At present, the global economy is pricing mining at a recession which has a vastly negative effect on the sector. All elements of mining should be avoided, with the exception of iron ore. Matthew says that China’s steel production will not be severely impacted by the virus, and the demand for iron ore will be similar to previous years.
Unlike mining, Matthew says banks are looking okay. Priced at a recession, banks will improve, particularly with the assistance of rate cuts.
How have you adjusted the portfolio during the outbreak of COVID-19?
Just as all portfolio managers at Wilson Asset Management, the outbreak of COVID-19 has caused Matthew to make some significant changes to the portfolio.
Similarly, he has increased the cash of his portfolio. The portfolio has also increased their defensive style holdings.
Matthew has structured the portfolio on a recession style period that will last for at least nine months.
What is one stock you like at the moment?
Controversially, a stock liked by Matthew at the moment is Flight Centre. This comes after Flight Centre announced the closing of 100 stores across Australia within the next 12 months. The stock fell 33.04% on Thursday alone and has been hit hard by the outbreak of the virus and the consequential travel bans.
Haupt says this is a good sign though. When travel bans are lifted, people will be desperate to travel, creating opportunities for Flight Centre.
“That one has got the most upside potential”
He recommends waiting for a while though. They have a long way to go until they can be considered a stock worth buying, but they will eventually benefit from the easing of government restrictions.
The bear has definitely begun to hibernate, and as noted by Geoff Wilson, the market hates uncertainty. Volatility will continue to consume global markets for the next period, but it may create a great buying opportunity.
You can listen to Wilson Asset Management’s 2020
Investor conference call here.
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