The Coronavirus has been the key driver of the market over the last two months. Concern about its spread caused a sell-off in global markets in January. In the first half of February, markets rallied back as new infections in China slowed significantly. However, in the latter part of the month, the spread of the disease outside of China caused a significant sell-off. The risk-off move saw defensives such as Healthcare and REITs outperform, while cyclical sectors such as Resources and Energy lagged.
The Coronavirus-induced concerns overshadowed the impacts of reporting season, which had seen the market be up +2.0% for the month as at 21 February, as many stocks reported profit results which were well-received by the market. Given the relatively subdued economic backdrop, expectations were low ahead of the reporting season. However, many companies are still performing well. The major banks, for example, outperformed after CBA – a bellwether for the banking sector and broader domestic economy – reported a solid result showing, amongst other things, that credit quality remains very strong. Results from the retailers also showed that consumer spending was better than feared. Strong cash flows and dividends from the major resources companies was another positive highlight of the reporting season.
The current level of uncertainty regarding the impact of the Coronavirus outbreak is very high. However, what is certain, is that it will pass. Further, before this issue arose, the global economic outlook was increasingly positive, with easing trade tensions and ongoing low interest rates seeing activity picking up in most regions. It is also important to note that this sell-off is due to an external issue, rather than being due to some fundamental economic or market imbalance. As a result, markets may well rally violently as signs emerge that the spread of the disease is slowing. However, should it prove to be prolonged, we are likely to see significant policy responses from governments and central banks to support their economies through this period, via a combination of fiscal stimulus and monetary policy.
Our response for the eInvest Income Generator Fund (Managed Fund): EIGA
Given we believe that this issue will be transient, we have not seen the need to significantly alter our portfolio positioning. We remain overweight the cyclical sectors of the market such as Resources and Mining Services, where we see a healthy supply-demand balance resuming, along with select exposures in the Consumer Discretionary and Diversified Financials. Our main defensive exposures are via Telstra and the general insurers, as we continue to avoid the “expensive defensive” sectors of the market such as Healthcare, REITs and Infrastructure. Further, we continue to see significant risk in the market’s highly-priced growth stocks, where very large market values are being ascribed to companies with little or no current earnings.
The current sell-off will no doubt throw up some interesting opportunities. In the meantime, we remain focussed on investing in companies with sound, long-term growth prospects, strong balance sheets and which can pay high levels of franked dividends to investors.
Disclaimer: Please note that these are the views of the writer, Stephen Bruce, Portfolio Manager of the eInvest Income Generator fund at eInvest and is not financial advice. To find out how to invest in our active ETFs, visit here. The product disclosure statement and more can be found at www.einvest.com.au