Recession-proof stocks revisited — how this defensive sector is holding up in the downturn
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Just over a month ago, Stockhead ran a piece looking at how investors could position their portfolio to buffer returns in the event of a market downturn.
By sector, we focused on the attributes of telecommunications infrastructure — a core service that clients still need even if the economy tanks.
The piece ran at the start of a rocky week, where investors shunned risk as the economic threat posed by COVID-19 became more apparent.
With the benefit of hindsight, that selloff turned out to be the commencement of a bear market that’s been historic in both scale and velocity.
Fast forward to this morning, and the global health crisis is still escalating as policy makers adopt unprecedented spending measures to try and keep major economies afloat.
Amid the chaos, we thought now marked an interesting time to revisit the space. No sector has been spared entirely from the selloff, but some of the recent price action has still been representative of a more defensive asset class.
For example, the recent volatility has seen the ASX200 financials index — a gauge of Australia’s big banks — crash by more than 10 per cent on two separate days since March 16.
But on both those days (most recently last Monday), Telstra finished in the green. At the smaller end of town, Stockhead caught up with Joe Demase, CEO of 5G Networks (ASX:5GN) earlier this week to get an update about how business is tracking on the ground.
As liquidity dries up, Demase said the business had to pull up the reins on its aggressive growth strategy, with a number of potential acquisitions put on hold.
But at a core business level, he said the crisis was helping to illuminate the benefits of 5GN’s end-to-end solution — cloud computing services backed by a network of company-owned data centres. Particularly as businesses scramble to adhere to increasingly stringent self-isolation measures.
“If people are logging in remotely, companies are going to need more capacity; say that server that used to need 10 remote logins, all of a sudden it needs 200,” Demase explained.
“So now you’ve got a critical piece of network infrastructure that needs to be redesigned. It needs to be installed and it needs to be managed. And in most cases where we’re the service provider, then we get that work.”
Demase highlighted the example of a client that needed to scale up remote capacity, and 5GN was able to make the configurational change on its network “within a couple of minutes”.
Steve Collette, an advisor at Perth-based Merchant Group, noted the new work-from-home requirements were likely to “amplify vulnerabilities in business practice in ways that sometimes won’t be anticipated”.
“I think in view of that, we’re about to learn which businesses had even considered a ‘black-swan’ event of this magnitude in the coming months,” he told Stockhead.
Meanwhile, 5GN’s Demase said this would “act as a real catalyst for corporate clients moving to the cloud”, and that’s where the company came into play.
“To make that work, I still think data centres will be considered essential locations because it means companies don’t have to worry. Having a data centre makes it easy to increase bandwidth in a cloud environment — you can ramp up and down quickly,” he said.
When we spoke to Merchant Group’s Collette a month ago, he highlighted that no company would be immune from the kind of downturn the global economy was seeing right now.
But in a crisis, capital will be slower to move out of companies involved in providing essential services.
In that context, Collette remains of the view that companies involved in the secure transfer and storage of key data will be more resilient in the months ahead. However, it’s probably not going to be pretty.
“Given central bank and government intervention, equities as an asset class are becoming progressively more divorced from the economies in which they operate,” Collette told Stockhead.
He expects “massive volatility over the next three months which will frequently seem at odds with what is being observed on the street”.
“It won’t be for the faint-hearted, but for those that survive in the corporate realm, there will be a larger piece of the demand pie left to service once we arrive to the other side,” Collette said.