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Weekly Manager Views

06 March 2020

At GAM Investments’ Weekly Investment Meeting held on 4 March, the speakers were Rob Mumford, who discussed the coronavirus and Chinese equities, and Aldo Meroni, who commented on earnings expectations across global equity markets.

Emerging Markets Equity

Rob Mumford

  • Inevitably, the impact of the coronavirus outbreak continues to dominate headlines and risk appetite. The rate of new infections has thankfully been falling sharply in both Hubei province (the apex of initial infections) and in broader China, though the increase in the number of cases in the rest of the world remains a concern. More normal business activity is starting to resume, but the number of people at work is still sharply below usual levels.

  • China’s authorities have launched a cascade of monetary, fiscal and industry-specific support initiatives intended to avert systemic negative impact from this slowdown. These have included a rate cut (of 10 bps), massive liquidity injections into the banking system, tax cuts and specific industry instructions (bank have been told to roll over loans and energy companies to lower product prices). That said, forecasts for China Q1 GDP growth have been lowered to around 2.5% versus end-January estimates of around 4.5% year-on-year growth.

  • The rise in the infection rate internationally muddies the demand recovery picture for select Chinese industries. However, our base-case scenario assumes that China will experience an ongoing steady economic recovery in the near term, with pent-up demand driving a decisive rebound in the second half of the year. This suggests to us that full-year GDP growth could still hit the 5-5.5% mark, though this depends on the impact of the virus internationally.

  • In terms of the equity market, selectivity remains key as the slower phase of growth will have casualties (and beneficiaries, though these will be in the minority). We are more negative on those sectors and business models that we deem most vulnerable to interim uncertainties. These include sectors facing higher cost burdens as a result of policy initiatives to support the economy (most notably, the energy, banking and telecom sectors). We are also more wary of sectors whose earnings are likely to be particularly hard hit by the outbreak (for example, casinos, certain types of consumer discretionary businesses and businesses reliant on significantly disrupted supply chains).

  • On the other hand, we favour selective businesses in sectors that we expect to prove most resilient to and, perhaps, to benefit from the current exceptional environment. These include selective e-commerce, online gaming, internet data centre and healthcare stocks.

  • In our view, the decisive and comprehensive policy response supports the credibility of the China authorities and illustrates the tool kits they have at hand to deal with cyclical threats (exogenous or otherwise). We expect this to limit the downside risks to the economy. This is one of the key legs of our positive long-term China equity thesis which comprises: premium growth rates; the firepower to protect that growth; and an improving quality of growth at what we regard as very reasonable valuations.

Global Long / Short Equity

Aldo Meroni

  • Our investment philosophy is founded on the belief that current stock market prices reflect all available market information and this is reflected in analysts’ consensus on earnings expectations. Therefore in order to generate positive returns, we believe the key is to seek to anticipate changes to earnings expectations, favouring stocks which look likely to beat analysts’ expectations and avoiding those which are likely to miss.

  • Global equity markets have faced a challenging two weeks, with sharp corrections and market dislocations stemming from concerns that the spread of the coronavirus was accelerating beyond China. We view the stock market sell off as excessive and irrational in some areas, particularly when looking at share price impacts on steady businesses with healthy cash flows, limited correlations with global cycles and defensive in nature. As global equity markets begin to appreciate once again, we believe the quality and resilience of such business will shine through, leading to bounce-backs and buying opportunities.

  • While we have a moderately bullish outlook, it is our view that cautiousness is compulsory at this stage. The next round of quarterly updates will likely bring negative surprises, particularly from businesses exposed to the consumer side of the economy. This leads us to believe that defensive areas of the market (healthcare / utilities / real estate) make sense in the current environment. Industrials and consumer discretionary stocks look exposed, in our view.

  • Ultimately, despite the macro noise, we continue to believe that focusing on companies that could significantly beat analysts’ expectations will deliver positive outcomes. The pipeline of potential longs neglected by the market in the past, when valuations were stretched, is likely to have increased given the dramatic equity market selloff. We will continue to monitor data on the spread of the virus, which may offer reasons to be more constructive.

Important legal information
Source: GAM unless otherwise stated. The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.
March 2020