Assessing companies as peak COVID-19 panic approaches

As markets head towards peak panic with the COVID-19 pandemic, it’s important to critically assess which of your moves are based on a temporary versus long-term environment – remembering always that we believe fortune favours investors who can hang tight when fear takes over.

The state of play

As we move into the thick of the COVID-19 outbreak globally, we are closely monitoring the duration and depth of this pandemic. At this stage, the virus is spreading faster than governments can move to quash it, and stimulus measures – though welcome and necessary – are not yet being palpably felt by markets. We are seeing crashes comparable to the GFC, and a crushing halt to one of the longest bull runs in history.

Though that reality is unsettling, now is precisely the time to be blunt about what we are facing. This is a once-in-a-century, global event. By its very nature, it is daunting and unprecedented. However, it is an event, and events pass. Our review of what is critically important now is to not make a decision based on a situation which will come to an end.

How we assess companies during peak panic

We monitor market moves in intense detail daily, and important data such as the rate of new cases per day – this gives us an understanding of how long and sustained the downward spiral will be.

In spite of the daily assessments, what we are looking for is an allegiance to our long-term position: companies with strong balance sheets in sectors with strong demand. Keep in mind that solvency can be a problem for companies with too much debt or leveraged businesses. The question we are asking about stocks in our portfolio is: can they trade through a disruption like this?

Though it might seem unfathomable with everything flashing red, there are opportunities for investors who are income and protection focused.

For example, in an Australian context, we believe telcos will likely benefit as people upgrade broadband and mobile data packages to accommodate working from home arrangements. Telcos are already showing encouraging signs as mobile price wars abate and average revenue per user on their networks grow¹.

There are other upsides to note also, though they should be monitored. For example, supermarkets are benefiting with a surge of stocking capacity, but are already on quite high valuations, so upside is perhaps limited.

We are overweight on infrastructure, rail and utility stocks as we like the resilience of the earnings in those businesses. Our thinking here highlights a critically important part of strategy during a crisis – though an airport, for example, may take a short-term hit, it will remain a critically important component of global infrastructure networks far beyond this temporary period of disruption.

Enduring wisdom

Though this is an unprecedented time, in many ways, it’s a classic representation of fear taking over greed in sudden and drastic form. We know from history that when that flip occurs, fortune favours those who are brave enough to trust their long-term thinking, and realise that this too shall pass.

That means companies and assets which had solid balance sheets and a long-term demand horizon we believe will come back in favour. In short, when society returns to normal functioning, we will require many of the companies currently flashing red to meet normal or increased levels of demand, and selling out of them during a temporary panic will only lock in a permanent loss.

¹ Deloitte, Mobile Nation, 2019