Authored by Clyde Rossouw, Co-Head of Quality
16 March 2020
The views expressed in this communication are those of the contributors at the time of publication and do not necessarily reflect those of Ninety One as a whole.
Global Franchise’s defensive qualities provide support
Equity markets have again fallen significantly as fears of a further spreading of the coronavirus, and likely stricter containment measures (particularly in the US), have been compounded by the emergence of a price war in the oil market, after Russia refused to agree to production cuts proposed by Saudi Arabia. Market volatility has spiked to levels not seen since the eurozone debt crisis in 2011. Amid this turmoil, however, we would urge long-term investors to note the underlying strength of the businesses we invest in, the inherent growth these businesses should deliver, and to strive to overcome any short-term negative sentiment that may result from the current market environment.
While not immune to the market sell-off, the Global Franchise portfolio has again shown its relative resilience, with smaller drawdowns than the market in the short term. Strong and reliable cash generation; healthy balance sheets (with aggregate net debt across the portfolio of around zero); lower cyclicality than the market; zero exposure to energy companies; and zero exposure to banks (whose net interest margins have been impacted by falling longer-term Treasury yields), have all contributed positively to relative performance in the short term. This has more than offset the negative impact from stocks held that have detracted from performance in the very short term (for example other financials such as Moody’s and Charles Schwab).
What is our outlook and how are we positioned?
It is difficult to draw meaningful conclusions over such short time periods, particularly given the rapidly changing situation. With regards to coronavirus, while medical professionals continue to model increased incidences of infections and mortalities worldwide, the reality is still that nobody knows how this will evolve, and extreme predictions will likely carry on receiving more airtime in the short term. We continue to believe that there won’t be a classic ‘V’ shaped recovery. However, with a significant global monetary and fiscal policy response, and signs that the growth of infections is now slowing in China, we still believe that the outlook should improve later in the year.
The cash position in our global portfolios had built up to around 10% at the beginning of this year. This has not only provided an additional buffer in these turbulent markets, but has also given us the ability to take advantage of recent short-term volatility. We have already begun to put some of this cash to work as valuation opportunities emerge on a longer-term view. We continue to monitor developments closely and remain front-footed in terms of portfolio positioning.