26 mar 2020
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.