Wilson Asset Management: The bear run isn’t over yet, but investors need to prepare for the rest of COVID-19 and beyond
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The COVID-19 crisis is not over yet, but three weeks since Wilson Asset Management ran its last investor conference call many things have changed.
Now the US is the world’s hotspot, lockdowns have hit Western countries and while businesses initially anticipated it would just be another period of soft demand, some are now needing bailouts to survive.
“Normally I am excited about a bear market. While I still am from an investment perspective, I think the toughest thing is not the economic pain but the human pain and disaster that’s occurring,” Wilson Asset Management founder Geoff Wilson said.
“We’re still in the panic area. You’re seeing the market adjust to the economic impact that the coronavirus has – there’s been a significant forced shutdown of commerce globally and it’s impacted profits and companies.”
But Wilson does believe there is light at the end of the tunnel.
“We will get to the other side, there will be a vaccine developed and herd immunity will increase and in a couple of years time, this whole process will not be as daunting as it currently feels,” he said.
“When we get to the bottom we can really perform on the way up. We all took a hit during the GFC but it only took a couple of years to make it back and go above that.”
Wilson believes the shape of the recovery depends on how fast restrictions are lifted. Furthermore, shares and the economy won’t necessarily move simultaneously.
Wilson and his portfolio managers spent an hour talking to investors this morning about its future investment plans. They suspected some things would be different on the other side.
The expectation is that there will be more automations, diversified supply chains, online shopping, working from home and the use of video conferencing.
Wilson said one permanent change would be millennials’ spending behaviour and it would be bad news for buy now, pay later stocks.
“You’ll find them [millennials] and the generation before will change their behaviours. They probably spent most of their money on experiences.
“I remember in 1980 the savings rate was 20 per cent, because we’d been through a difficult period. They [millennials] will be more risk averse – a higher savings rate, and spend less money on experiences.”
Portfolio manager Oscar Oberg says for this reason Wilson is cold on the buy now, pay later sector.
“They have not been tested in a recession and their clientele is mainly millennials who will be impacted the most,” he explained.
Another sector set to suffer is real estate investment trusts (REITs). If working from home sticks around, it follows that companies will need less office space.
Matthew Haupt stuck the ‘stay away’ label to what he called “cyclical companies exposed to economic trade”.
“It’s still too early to be in that space. The world is going into recession and you don’t need to be in it,” he said.
Wilson says he is selling stocks with significant debt due in 12 months, having learned during the GFC these companies are higher risk.
But companies raising capital in the next six to 12 months could restore the faith.
“During the GFC, over 10 per cent of [the ASX’s] capitalisation was raised in this period. We are starting to see that again and we think there will be significantly more in this period of time,” Wilson said.
Wilson’s portfolio managers named entire sectors that could benefit, particularly those suited to their clientele being indoors.
Catriona Burns named food retailers including American-listed Nomad Foods (NDQ:NOMD) and Swiss-listed Nestle (SQX:NESN). She was also bullish on companies in the payments space, naming Tencent (HKG:0700), Paypal (NDQ:PYPL) and Visa (NYSE:V).
“We think the payments space will help this transition occur more quickly,” she said.
Among Australian stocks, Wilson has been buying gold miners.
Gold is traditionally perceived as a safe haven but in recent days is off its record highs in US dollar terms. Haupt attributes the dip in gold price to the rush into the US dollar, due to the Federal Reserve’s stimulus.
“Now there’s so much fiscal out there that gold should do well so long as they can survive this US dollar shortage,” he said.
Iron ore was also a commodity tipped to do well as industrial production resumes in China.
“The way they’re going to grow is launching infrastructure projects – steel is a part of it and iron ore goes into it,” Haupt said.
“We’re expecting iron ore to have 1.1 billion tonnes runway between April and December.”