Australia Strategy: COVID-19 sector impacts and strategies
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 27 March 2020, 12:00 PM
- Sectors Covered:
- Resources, Metals
- Morgans research analysts reset their sector views, strategies and preferred picks in light of COVID-19 risks to the economy.
- Views will evolve as the effects of the pandemic become clearer. For now we prefer equity positioning tilted toward defensives (utilities, telco, healthcare), with further downside risks identified in cyclicals (banks, consumer).
- No crisis lasts forever, nor will this one. We remind investors to discard the noise, assess the calm facts and adjust their strategies to prepare for opportunities as the health crisis abates.
Defensives: Safe havens at compelling valuations
Energy/power supply (APA Group (APA), AGL Energy (AGL)), Healthcare (Sonic Healthcare (SHL), CSL Limited (CSL)), Telecommunications (Telstra Corp (TLS), OptiComm (OPC)), and Food supply (Woolworths Group (WOW), Freedom Food Groups (FNP)) are key essential services likely to remain most resilient to heavy population movement restrictions in coming months.
Many are trading at valuation discounts not seen since the GFC. We acknowledge that defensives will likely underperform an eventual market recovery, but the severity and duration of this event remains unclear. Also, the balance sheet resilience to disrupted trade of many cyclicals is coming into acute focus as vulnerable corporates raise capital, or consider worse.
Our Strategy Flash Note, Sticking to the essentials, March-25 details several essential services providers, including an assessment of balance sheet risk.
Cyclicals: Dip a toe in, but note risks remain elevated
The pandemic has triggered the largest co-ordinated global monetary and fiscal response in history. Given the fluidity of the situation, our analysts flag earnings and dividend downside risks to cyclicals including Banks, Consumer discretionary and potentially Transport infrastructure stocks.
The re-pricing of risk across the market has been savage, and may well prove to be overdone for many stocks. At this point though, investors must appreciate the higher earnings/dividend uncertainty among cyclicals (risk), and the wider range of plausible outcomes (returns) pending resolution of the pandemic. Note we expect discounted capital raisings to ramp up in many cyclicals (Travel, Retail).
However, the GFC also showed us that equity raisings can define the turning points for many cyclicals in these scenarios, signalling an easier catalyst to buy, rather than trying to ‘time’ buying during immense volatility.
Think through to the other side of this
No crisis lasts forever, nor will this one. Now, more than ever, investors need to discard the noise, assess the calm facts and be clear on their strategies. We think equity markets will likely stabilise when it becomes clear that the number of new daily cases of the virus has peaked, despite the economic impacts lasting for longer.
Those companies with the strongest competitive/market positions, balance sheets and adaptive strategies will be able to re-set in order to thrive through an eventual recovery. Yes investors do need a strong stomach in the meantime, but we suspect that rare opportunities are likely to emerge in the coming weeks and months.
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More analysis on the effects of COVID-19
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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.