Winners in the rout | Fin24

Asking 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.

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{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} in five weeks.
In a note to clients, Davey highlighted four international stocks that may
navigate the turbulence better than
others.

And most of them are consumer
defensive stocks.
The 135-year-old Johnson
& Johnson “has grown to
become the largest, most
diversified healthcare giant
globally with operations in
virtually all countries in the
world”, she wrote.

Pharmaceutical products
contribute 51{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} to its revenue
and 58{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} to its profit, medical
devices comprise 32{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of
revenue and 32{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of profit, and
consumer healthcare (including sanitary
products, which are in high demand during
the crisis) delivers 17{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} of revenue and 10{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}
of profit, according to Davey’s calculations.

“Johnson & Johnson is ideally placed
to benefit from medical demands of an
ageing demographic as people tend to live
longer,” she wrote.
Davey told finweek that Reckitt
Benckiser – the maker of Dettol and
Nurofen; and Procter & Gamble – which
produces Vicks, may also benefit as the
coronavirus pandemic continues.

Where people are stuck in their
homes, companies such as Netflix – the
streaming television network – may
benefit, says Engelbrecht.
He also mentions that online retailer
Amazon stands to benefit as people steer
clear of bricks-and-mortar shops and rather
buy their goods online.
“This might be the event that forces
people to join or adapt to the new (digital)
economy,” says Engelbrecht. “It might
change the way in which enterprises
do business.”

The demand for Amazon’s
products led to the company saying on
16 March that it plans to hire an additional
100 000 part- and full-time staff in the US.

Local stocks

Even in the local environment, those listed
companies facing consumers directly and
selling essential goods and services would
probably be more resilient than others.

“Naspers* is well-positioned with its
stake in Tencent,” says Engelbrecht. “It is
also noteworthy that activity on Tencent –
including games – was tracked as a proxy in
China to determine when productivity
would start to increase after the
coronavirus outbreak. ”Clicks and Dis-Chem are two
other stocks that may ride the
wave less scathed than others.
“They are in a good position
given that their stock levels hold
up,” says Engelbrecht.

With regard to grocers such
as Shoprite, Pick n Pay, Spar and
Massmart, Engelbrecht says he’s
on the sidelines for now. “We don’t know
whether people who are stockpiling now
are expediting their eventual purchases
or whether these are additional to future
purchases.”

And the losers?

Not all companies are equal as the
pandemic straddles the planet.
“We are very selective on which
financial companies we have exposure
to and have constructed our portfolio
to be underweight financial companies
in a low-growth and low-interest-rate
environment,” says Davey.
Interest rates have been lowered in the
rest of the world in response to anticipated
lower economic growth (read cover story
here).

Locally, a lower interest rate
environment will shrink the banks’ margins
as the monetary policy committee pulls out
the stops to kickstart the economy – on 19
March the monetary policy committee cut
interest rates by 100 basis points.
In addition, Engelbrecht says that
those companies that rely on foot
traffic will likely suffer the most. “Those
companies selling durable products such
as televisions, and car dealerships will
likely be impacted,” he says.

He mentions
that at the height of the coronavirus
outbreak in China, there was one week in
which almost not a single car was sold.

*finweek is a publication of Media24, a subsidiary of Naspers.

This article originally appeared in the 2 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.