The last few weeks have seen a massive sell-off in the equity market caused by the COVID-19 pandemic threat to the global economy and exacerbated by the oil price collapse. Initially seen as a supply side problem for the global economy as China shut down to contain the virus, the issue has swiftly become an even more serious global demand side problem, as the virus has spread to developed markets, with efforts to contain the disease severely disrupting economic activity. In recent days, we have seen government and central bank stimulus measures in an attempt to mitigate the worst impacts of the economic slowdown.
Our poorest contributors since the start of February have been driven by several different investor concerns. Elementis has sold off on concerns about its end markets and the strength of its balance sheet and Accesso has been weak given its exposure to ticket sales at its venue customers. The RPS share price has fallen on limited earnings progression and exposure to activity in the Oil and Gas market and IWG has sold down on a lack of further franchise deals and concerns about a trend to home-working.
As the crisis has evolved, we have taken several steps. Initially we reduced our holdings in companies that we felt were heavily reliant on Chinese manufactured goods, namely B&M European Value Retail (discount homewares) and IG Design (global giftware products). As we became concerned about tourism in London we reduced our holding in Rank Group (casinos, bingo and online gaming) after a very strong run. Finally we have been reducing holdings in some of our more highly rated stocks such as Blancco Technology, IMIMobile and The Pebble Group, all after strong relative outperformance, feeling their valuations looked exposed as the tide went out, with a view to increasing our weightings again if and when they sell-off.
To date the sell-off has been pretty indiscriminate giving us the opportunity to top up holdings which we felt look over-sold, to start buying some old favourites, which until recently have not met our valuation criteria (like Electrocomponents and Bodycote) and finally to add some less economically correlated stocks like Qinetiq (defence), Augean (specialist waste) and Goco (the price comparison site), which hopefully will prove to be resilient in depressed economic conditions.
Just as with the 1987 crash and the 2008 credit crunch, we expect the equity market to recover from the Corona crash at some stage. It’s interesting to note that the companies we have spoken to with Chinese (the initial virus hotspot) supply chains are indicating that production there is pretty much back to normal after the period of containment. Whilst we can’t predict when the current sell-off and volatility will end, it’s worth remembering that in the meantime the Fund’s investment strategy is to invest in cash generative companies with strong market positions. On recent analysis circa 40% of the Fund’s assets are held in stocks with no debt.