01 April 2020
At GAM Investments’ Weekly Equities Meeting held on 30 March, three of our portfolio managers discussed their views on current market conditions.
Gianmarco Mondani - Developed Europe Long / Short Equity
It is clear that the investment case for many companies has changed. The majority of companies are no longer going to meet 2020 earnings expectations; some may even experience credit problems. When things change so much, it only makes sense to for us to adapt. Therefore, we believe a focus on companies that can beat or at least meet expectations, despite an expected heavy recession, is appropriate. Short opportunities may arise among stocks with weaker balance sheets and whose earnings prospects are unlikely to improve for a long time. In order to avoid shorts on stretched timing, a focus on indices may be wiser. We expect ample market opportunities to occur over the next few months. Unlike many, we do not think there will be a ‘V’ shaped recovery as the damage to companies’ bottom lines and balance sheets are likely to be significant. Some companies will come out stronger, but we believe others will rely on the lifeline of government credit. In our view, increasing gross exposure makes sense when volatility abates, and earnings expectations become more realistic. We believe that when the dust settles we should see an environment where those companies able to master their own destiny will sharply outperform weaker ones, as it is often the case in the aftermath of a crisis, and this can be exploited through a long / short strategy.
Daniel Haeuselmann - Swiss Equities
Our philosophy has long centred around investing in companies with good management and this is particularly pertinent at the moment. In the Swiss market, for example, we have seen examples of good management teams almost seamlessly switching into emergency mode to master the coronavirus situation step by step where needed. Alongside this, however, we believe investor focus should be on companies with healthy profitability and good balance sheets. We believe a combination of these two points is very important for protecting investors from any lasting loss in value.
In general we want to make sure that we focus on companies that we believe can make it through the current crisis without a capital increase, as this would be something that destroys long-term value. Strong companies with strong balance sheets have a clear competitive advantage in such times.
Adrian Gosden – UK Equities
It is now quite clear there is a growing consensus among UK listed companies that the impact of the coronavirus is profound. As a result, cash management is important. This has led to the cancellation of dividend payments to investors and, in some cases, the reduction of salaries for executives and employees. It has started in sectors where you would expect, such as construction, retail, leisure and travel. The major UK banks have also cancelled their dividends. We are rapidly moving into the ‘moral of dividends’.
We see a timely opportunity to raise exposure to large cap oil. The oil price has slumped to an 18 year low and seen its biggest decline in a quarter. Q1 2020 saw increased supply (stemming from disagreement between Saudi Arabia and Russia) at a time when world demand was falling sharply due to the coronavirus pandemic. USD 20 per barrel has replaced the USD 60 per barrel as a normal price in investors’ minds. Oil company shares have responded by collapsing in value and investors now question the ability of these companies to pay dividends. For example, Shell’s equity fell to a level representing a dividend yield of 15% should they honour the payment. Management have articulated cuts to capex and better working capital in an effort to encourage investors of their dividend commitment. Despite this, investors seem to be remaining sceptical. We are more optimistic on oil company dividends. Many of these companies have a good history on honouring their dividends (unlike some sectors), even making disposals if necessary. We have seen USD 20 oil before and dividends were maintained. Our investment thesis is built on Asian domestic demand improving as the strangle hold of the coronavirus is lessened in that region. More on hope than knowledge, we expect to see an improvement in Saudi Arabia and Russian relations (possibly through US intervention).