Finding the beneficiaries of a sea of change

At times of market dislocation, opportunities emerge from the noise. Where are the potential long-term winners?

2020 M03 26

4 Minutes

At times of market dislocation, opportunities emerge from the noise. Where are the potential long-term winners?

Arriving at my desk for my first job in the City of London in the 70s’, I was issued with a pair of black framed glasses with no lenses but a small torch strapped to each arm, “so you can keep working when the lights go out”.

The memory of that moment and the degree of pessimism as to the prospects for both my chosen metier, the market and indeed the world at that time of high social unrest and economic decline has stayed with me over the years. Despite witnessing a series of market panics since then – including Black Monday, the Asian crisis, the tech bubble burst and the global financial crisis – the sense of foreboding never quite reached the same level as that first moment since all of these events seemed crises of the market’s making.

That is until, arriving at my office last month in Hong Kong, I was handed a pack of facemasks and that sense of foreboding returned. Here again was a combination of that social and financial anxiety that had proven so unsettling during my initiation to the world of finance, albeit in a different guise.

Of course, looking back that sense of foreboding should have provoked me into borrowing every cent I could and investing it in the market – the returns would have been spectacular over the longer term. But we are all hostages to our emotions and fear is a particularly powerful sensation that can be persistent, as can be euphoria. Hence the need to be cognisant of momentum when investing in stocks.

However, at times of market dislocation when all investors want is safety at virtually any price, opportunities appear. These usually relate to excessive pessimism, new technologies and beneficiaries of behaviour pattern changes brought about by the crisis. Indeed just ‘buying the market’ can prove rewarding in the near term as broad rebounds will occur, which will happen at some point soon. But identifying the long-term winners is the key strategy over time.

At the advent of my first employment, the world’s largest companies included General Motors and Ford, as well as a host of oil and chemical companies of which only Exxon remains in the top tier at no.12 today. Eight of the current top ten did not even exist at that time. So, scanning the decimated landscape of the global market today, where do these opportunities lie?

First, governments will have to act to reflate the global economy following the coronavirus crisis. We believe that they will focus on infrastructure spend to achieve this. We have found and bought potential beneficiary Chinese heavy equipment manufacturer Sany Heavy, listed on the A share market and trading at an attractive value compared to its peers such as Caterpillar and Komatsu. It’s also gaining market share across Asia thanks to a lower-cost base and improved customer servicing and financing. The combination of strong sales growth, relative value and upgraded earnings estimates, while potentially gaining from an increase in government infrastructure spend, is very appealing to us.

Second, as a beneficiary of new social trends we have identified Yealink Network Technology, another China A-share name that we feel will participate in the huge potential around homeworking. Its videoconferencing and voice communication products are not only enjoying strong demand and gaining market share globally, but it is also benefitting from a relatively underpenetrated market. In China, where working from home is seeing an upsurge as a result of the virus, we think this is likely to be a more lasting trend. Analysts have consistently upgraded both sales and earnings per share estimates. Not yet well known to global investors, this is a stock that we believe can potentially achieve much more recognition going forward.

We are also increasing our exposure to 5G technology, which we anticipate being a strong growth area going forward. Here, a new addition for us is US company Keysight Technologies, a key manufacturer of testing equipment across a range of industries including 5G networks. The management team has upgraded its financial expectations for 2020 and we believe paints a strong medium-term growth path. There are around 60 operators working to deploy 5G networks today and that number may aim to expand to more than 300 in coming years to the company’s benefit.

These companies represent some examples of the sort of ideas we are finding in the current distressed environment for equities. With them, we seek to build a portfolio that will not only benefit from a market rebound, but that we believe will be resilient and benefit from longer-term changes in government fiscal policy, social trends and new technologies. The lights at the end of the tunnel. Carpe Diem.

Authored By

Mark Breedon

Co-head of 4Factor

First in and first out - China as the vanguard for COVID-19 recovery

China’s path to normalisation offers guidance for other countries’ exit from the lockdown. Where are the opportunities for investors? ...

Past performance is not a reliable indicator of future results.

General risks

The value of investments, and any income generated from them, can fall as well as rise.
No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided.

Specific risks

Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income.
Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss.
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company.
Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.



Important information

This communication is not for general public distribution and is intended for institutional investors and financial advisors only. It is not an invitation to make an investment nor does it constitute an offer for sale.  
In Australia, this document is provided for general information only to wholesale clients (as defined in the Corporations Act 2001). 
All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This is not a buy, sell or hold recommendation for any particular security. Portfolio holdings may change significantly over a short period of time. 
Any decision to invest in strategies described herein should be made after reviewing the offering document and conducting such investigation as an investor deems necessary and consulting its own legal, accounting and tax advisors in order to make an independent determination of suitability and consequences of such an investment. This material does not purport to be a complete summary of all the risks associated with this Strategy. A description of risks associated with this Strategy can be found in the offering or other disclosure document for the Strategy. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions. 
Issued by Ninety One, March 2020.