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What we’re watching in our holdings as lockdowns are rolled out

By Dermot Ryan
Sydney, Australia

Large parts of the Australian economy are shutting down, and we anticipate further draconian measures are on their way. This creates a substantial knock-on effect in consumer behaviour. How companies manage through the weeks and months ahead is imperative for investors to understand.

It’s our view that investors with current holdings in Australian shares, or indeed people looking to start or increase their investing in the market, need to think about picking the best line-up of companies for their share portfolio for the recovery while share are on sale.

How Australia is tracking in the COVID-19 crisis

Australia is continuing to move towards a broad-based shutdown. This will grind some industries, like hospitality and retail, to a halt and see the unemployment rate sharply increased.

For Australia and the rest of the world, this crisis impacts both supply and demand. It impacts supply through diminished output and constrained logistics, and demand through a reduction of consumption.

Rightly, containment and the health of the national population are being prioritised above all else at the moment. In saying that, the Australian state and federal governments have moved quickly to inject stimulus and reduce the severity of the recession we are likely already in. By our numbers, the total stimulus announced so far is equivalent to about 3.5% of GDP.

It appears the government is also looking to keep as many marginal jobs functioning as it can, so that businesses and the tax base are in a position to bounce back once the virus slowdown has passed.

Challenge every holding

As we move into the more severe of the lockdown measures, consumer behaviour is going to again abruptly change. What they spend their money on, how much money they’re willing to spend and where their dollar will stop going altogether is important. Whether a company can survive in these conditions, and is positioning itself to rebound, is crucial to our thinking.

Of course everyone’s circumstances are different but we believe some tips investors can consider include:

  • Stick with companies who have good balance sheets for now, as they are typically best placed to weather a storm. Excessive debts or near-term refinancings are not your friend when money is tight.
  • Be ready to assess capital raisings as some companies will need to come to the markets for fresh equity. There may be some great deals on offer for new shareholders.
  • Be very wary of investing in some of those loss-making and high-valuation sectors, like IT or biotech, as the markets’ toleration for business models that need constant funding will change. 

Thoughts from Dermot Ryan earlier in the week about navigating a market in freefall

Thoughts for beyond the COVID-19 crisis

The one thing we know for sure throughout this devastating ordeal is that economies will re-open at some stage, and this too shall pass. With that being one of the few certainties at hand, investors would be well placed to keep a sharp eye on their long-term strategy, not the temporary and panic-laden environment markets are currently operating in.

Some thoughts AMP Capital is considering for life beyond COVID-19:

  • The government will likely spend more to improve the quality of the NBN, which will benefit the telcos.
  • With the Australian dollar at a multi-year low and uncertainty globally, we think Australians will take more domestic holidays once things settle down. Exporters like our energy, mining and even wine industries will benefit from this new currency tailwind.
  • Cash and social welfare payments are going to have to be hastened to keep oxygen and cash flowing to the most vulnerable in society. This will be good for retailers with strong online presence. Also, more white-collar employees working from home means more online shopping for goods like monitors and office chairs.
  • Robust companies with cash flows, balance sheets and strong business models will trade through this period and thrive once the economy inevitably opens up again

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Dermot Ryan, Co-Portfolio Manager (Income)
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While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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