COVID-19: A view from the UK, US, Europe, Asia and Japan

The world is embarking on a long journey back to social and economic normality, however the full extent and long-term impacts of COVID-19 remain unknown. What effect has coronavirus had on different regions around the world? Where are managers seeing opportunities and what’s the outlook for investors post COVID?

On Tuesday 30 June 2020, the Association of Investment Companies (AIC) hosted a media webinar with Hugh Young, Manager of Aberdeen Standard Asia Focus, Gervais Williams, Manager of Diverse Income Trust, and  Francesco Conte, Manager of JPMorgan European Smaller Companies, to discuss the impact of coronavirus, how their portfolios are positioned and the outlook for the regions in which they invest.

Their views have been collated alongside comments from Nicholas Price, Manager of Fidelity Japan Trust and Tony Despirito, Co-Manager of BlackRock North American Income.

COVID-19

Hugh Young, Manager of Aberdeen Standard Asia Focus, said: “Obviously COVID-19 has affected the whole world badly. Asia is a curate’s egg, most countries have dealt with it well and virtually all arguably better than the UK.  Clearly it will be a recessionary year for the region as a whole, and a number of companies may well fold whilst others will seize the opportunity.”

Nicholas Price, Manager of Fidelity Japan Trust, said: “In Japan, we were in a semi-lockdown for around 1-2 months. The mortality rate and hospital cases look to have peaked here. Tokyo exited from a partial lockdown at the end of May (with regional areas before that), and the Japanese government is in the process of lifting the remaining voluntary restrictions on businesses and domestic travel. At a company level, overall balance sheets are in good health relative to other regions and the banks have plenty of capacity to lend. We are seeing some dividend cuts and I would expect buy backs to be more limited going forward, but I don’t see that causing a significant impact.”

Tony Despirito, Co-Manager of BlackRock North American Income, said: “Upbeat fourth-quarter earnings, improving business sentiment and a phase 1 US-China trade deal compelled US stocks higher to begin the year, until the global spread of coronavirus brought a swift and sudden reversal. Concern over the human and economic toll of COVID-19 has prompted emergency measures from governments and central bankers. Some investors have only experienced bull markets, as we’ve lived in one for 11 years.

“Volatility never feels good, but the foundation underlying it is important. Daily market moves in response to the COVID-19 outbreak have matched the scale of those seen during the global financial crisis, but we believe this is not 2008. The coronavirus shock is not one caused by a crisis in the core of the financial system and spreading to the rest of the economy. The economy is on a much stronger footing and the financial system is much more robust. In fact, we believe policy measures and safeguards put in place since 2008 have only strengthened the financial system.”

Outlook

Gervais Williams, Manager of Diverse Income Trust, said: “Generally, I think the prospects for the UK economy are unexciting. The government has bridged the corporate cashflow squeeze at present, but if there are ongoing virus hotspots, we worry that the government won’t be able to keep borrowing at an elevated rate for too long. So overall, we think the economic recovery won’t be robust, and that at times we may face further setbacks. This is a difficult environment for mainstream companies to grow, as it is hard for those with major market shares to grow when the world isn’t growing.

“In contrast we anticipate that small cap companies will be able to take market share from those that have become insolvent. Some will acquire insolvent businesses and keep the skilled labour but reinject additional working capital, to generate an attractive cash payback. I think this will lead to small caps outperforming the mainstream stocks. In that regard the UK is very different from most other stock markets, it is the world leader in quoted small caps. Overall, in my view the UK stock market will outperform most others because of its quoted small cap universe.”

Francesco Conte, Manager of JPMorgan European Smaller Companies, said: “Europe’s strength is its ability to manufacture highly engineered premium products that are exported worldwide. It should not be a surprise that with global trade having been bruised as a result of the pandemic, Europe’s dominance in premium cars, aeroplanes and luxury goods will have had a negative impact on the region. Conversely following unprecedented fiscal and monetary policy, we should not be surprised that as the current anaemic economic recovery morphs into a synchronized global recovery, Europe will once again benefit. From a valuation viewpoint, the case for equities remains compelling. The shape of the path to recovery is uncertain but our investments include many world leaders in markets that should grow.” 

Tony Despirito, Co-Manager of BlackRock North American Income, said: “Stock volatility is likely to persist as investors weigh the impact on corporate earnings and global supply chains. We expect earnings will be hard hit in 2020 but see coronavirus as a transitory event (perhaps three to six months) that does not permanently impair the world economy and company earnings power.”

Nicholas Price, Manager of Fidelity Japan Trust, said: “Japan continues to offer an attractive combination of cash-rich companies, low relative valuations and secular growth opportunities. Being here on the ground is invaluable for looking at the micro level and speaking to company management to fully understand the current dynamics. This puts us in a strong position to continue to identify mispriced winners and reward investors.

“Globally, bear markets often create turning points and changes in market leadership, so I am looking at some of those discarded stocks that are not being focused on and are likely to emerge from this changing situation. Significant fiscal stimulus and government subsidies are likely to throw up new leadership and new winners from discarded losers. Although volatility may continue in the short term, this enables us to invest in strong growth names at attractive valuations, which should create positive long-term outcomes for clients.”

Opportunities

Francesco Conte, Manager of JPMorgan European Smaller Companies, said: “Analysing the trust today, the most common threads in our investments can be grouped under wellness, technology and the environment. COVID-19 has not changed these trends but in fact reinforced the importance of them.

“Wellness – Amplifon, the global leading hearing aid retailer, looks well placed to benefit from the need for personalised and distinctive hearing solutions for a rapidly growing ageing population. With an excellent management team, rising revenues and a cash-generative business model, we believe the Italian company is well placed to continue growing rapidly through organic and acquisitive growth.

“Technology - Online shopping has grown rapidly over the last few years and was accelerated during the pandemic. One company that has benefited from this trend has been the German online pharmacy, Shop Apotheke, as people avoid social contact. Moreover, the German parliament has made it mandatory for all prescriptions to be online by 2022, raising the possibility that the market may accelerate further in the future.

“Environment - we believe that reducing pollution, plastic, and our carbon footprint is key to better welfare. These trends should accelerate further as European companies prepare to adopt new rules that will require them to disclose their environmental, social and governance risks from 2021. There are several companies in Europe spearheading the drive to environmental sustainability. Tomra based in Norway is by far the world leader in reverse vending machines for the recycling of plastic bottles. Last year, thanks to their machines, some 3.5 billion bottles were recycled.”

Hugh Young, Manager of Aberdeen Standard Asia Focus, said: “Small caps in Asia offer a myriad of opportunities, there are thousands of them across geographies and sectors. The key is to sort the wheat from the chaff. Hence our large, long-established team across the region. There are also opportunities from price movements – when markets fell sharply we were able to invest in certain companies that were on our radar screen or top up existing holdings where we could still be confident of the prospects notwithstanding the impact of the virus. For example, we recently took advantage of share price weakness to initiate a holding in Singapore’s Raffles Medical, a leading healthcare provider with hospitals and clinics across Asia. Its long-term prospects appear attractive, fuelled by its expansion in China.”

Tony Despirito, Co-Manager of BlackRock North American Income, said: “The healthcare sector has held up better than the broad market since the downturn began on February 19. The MSCI Health Care Index was down nearly 22% through March 16 versus an S&P 500 decline of roughly 29%. This is what we would have expected given the sector’s defensive characteristics and limited reliance on the economic cycle. We continue to like healthcare for its history of resilience.”

Risks

Gervais Williams, Manager of Diverse Income Trust, said: “We fear that virus hotspots will continue to keep popping up, and that this will slow the economic recovery. Specifically, we fear that there will be numerous redundancies, and that many over-levered companies will go bust, most especially within the consumer sectors. In general, Diverse Income Trust has avoided the consumer sectors, unless they are taking market share such as companies like AO World.”

Nicholas Price, Manager of Fidelity Japan Trust, said: “In Q1 a number of factors came into play. The large uncertainty created by the coronavirus starting in Asia severely affected holdings in areas like automotive semiconductors, tech and travel. As the crisis worsened, I looked at company balance sheets and survivability, reducing some of the winners from 2019 which I thought were vulnerable to profit taking. On the ground, we’ve obviously gone through a poor earnings season but it has been encouraging that stock prices generally haven’t reacted, which I think indicates a lot of the bad news is already discounted in prices.”

Hugh Young, Manager of Aberdeen Standard Asia Focus, said: “There are always plenty of risks from the political, macroeconomic and epidemiological points of view, but our concentration is on the risks at the individual company level, where we rely on our thorough due diligence. Long-term business outlook, experienced professional management, strong finances and good governance - incorporating all ESG aspects - are vital to our process. This, with a spread across sectors and countries, mitigates risks.” 

-Ends-

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Notes

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