Over the last week we have seen a notable rebound in equity markets and risk assets in general. Whilst the emergence of green on investors’ screens provides some comfort, we do our best to avoid focusing on these short term gyrations especially when they are as pronounced as they are!
The rapid pace of the sell off in recent weeks and the retracement of about half the losses implies to us that technical aspects, such as forced liquidations, have been a key factor behind shorter term market moves. The positive conclusion you could take from this, is that the prompt actions of the Central Banks have ensured that the financial system continues to function despite the scale of current downturn.
However, the more important question for everyone has to be the road to normalisation in economies and the degree and pace at which consumption returns to prior levels. This crisis will no doubt be an inflexion point for some consumer behaviours longer term, but the market as always has been very savvy at identifying who the short term winners are. Box set binging, gaming and the invention of new actions such as Zoombombing are the known knowns. Whilst these business models are clearly winning, their relative valuations suggest investors are crowding into them at the same pace as they are consuming Netflix series such as the Tiger King.
Those businesses with much less clarity about their future have led the markets over the last week or so, and they still provide significant relative value versus safer and more predictable businesses. However this “value” is based on historical financials, and takes no account of potential structural challenges going forward such as shaky oil cartels, central bank led yield curve suppression or the willingness to embark on leisure cruising. Cyclical operating leverage will be an attractive feature of the survivors, but an irrelevance to those that fail.
This is the dilemma that faces us when stock picking amongst the carnage and as we enter into the start of the corporate reporting season. It seems unlikely that company managements will have any greater foresight than investors, but they will provide some gauge on the strength of their franchises and the ability of their balance sheets to weather a more prolonged downturn. Of particular focus will be how management teams get the appropriate balance between shareholder returns and the wellbeing of their employees and other key stakeholders. In essence each Future Quality pillar (Franchise, Management, Balance Sheet and Valuation) is being tested when companies update shareholders. Our focus in the coming weeks is to be singularly focused on these tests for all of our holdings.
Nikko Asset Management New Zealand Limited (Company No. 606057, FSP22562) is the licensed Investment Manager of Nikko AM NZ Investment Scheme, Nikko AM NZ Wholesale Investment Scheme and the Nikko AM KiwiSaver Scheme. This material has been prepared without taking into account a potential investor’s objectives, financial situation or needs and is not intended to constitute personal financial advice, and must not be relied on as such. The Product Disclosure Statements are available on our website: https://www.nikkoam.co.nz./invest/retail