June saw a continuation of the TINA (There Is No Alternative) trade as markets responded to the unparalleled stimulus measures from governments and central banks across the globe, despite fears of a second wave of COVID-19 as infections spiked across a number of countries, particularly the US.
Recessionary conditions still loom large. The earnings downgrades and/or removal of previous guidance due to COVID-19 has continued. Given cash flow concerns, company boards have reduced or cancelled dividends for the foreseeable future and capital raisings have been on the rise as another source of funds to allow companies to weather the storm. Thankfully, unlike the GFC, most banks are well capitalised, have enough liquidity and are being supported by the government and regulatory bodies to allow them to be supportive to customers that are under stress.
While the rapidly developing situation and ensuing uncertainty makes forecasting more difficult, we continue to reassess our earnings estimates. This includes reviewing short-term earnings and implications for dividends and balance sheet risk, as well as long-term earnings, which has implications for valuations. As well as assessing the risks associated with stocks in the portfolio currently, we are also actively assessing opportunities thrown up by any aggressive and, in some instances, indiscriminate sell-offs. Ultimately the impact on long-term earnings estimates and valuations will be a function of the depth, duration and damage inflicted during this period of enforced subdued activity.
“How deep” and “how long” are the relevant questions being asked within Nikko AM, as the past few months have seen a dramatic turn in the global economy due to the spread of COVID-19.The unprecedented speed of this correction and changing economic landscape due to government intervention is making assessment of sustainable valuation difficult. However, this provides opportunities within different sectors and stocks as the sell-off has often been indiscriminate. The combination of extreme positioning and valuation differentials always provides strong forces when the market reverses. Like other large market corrections, it is always difficult to pick the bottom and thus rotating slowly into some of the beaten down value names funded by reducing and exiting the outperformers is an approach that we have found has worked well in these type of markets.
Brad Potter, Head of Australian Equities – Nikko Asset Management