The market divides and conquers

The current market crisis is dividing the market into performers and underperformers, with signs now also emerging of opportunities.

“We are looking for businesses which can survive the current pandemic and thrive in the global recovery which is expected to follow, most likely in 2021. We are starting to see some value emerging in a number of quality growth stocks, real estate and infrastructure,” said Danial Moradi, Portfolio Manager of Listed Products, Lonsec.

The Energy sector has been the weakest sector in this sell-off, down by around 50%, due to the global economic slowdown and oversupply concerns from the Middle East. On a relative basis, Woodside has the strongest balance sheet amongst the large cap energy stocks, however, the sector is expected to remain under pressure for some time.

Banks have also been weak with concern over possible increases in bad debts. ANZ and NAB have relatively larger commercial exposures compared to CBA and Westpac, and for this reason, Lonsec favours the two latter banks who have a larger exposure to residential loans rather than unsecured commercial lending.

REITS and infrastructure have also been disappointing with a significant widening of spreads together with the prospects of broad scale shutdowns in a number of regions.

“These stocks have high gearing levels and the market has turned on them,” explained Moradi. “Meanwhile in infrastructure, the lack of people movement is impacting toll roads, airports and utilities.”

However Lonsec sees value in stocks impacted by this current one off event in market conditions rather than balance sheet challenges. For example Sydney airport’s market valuation has halved over the past month, for an event that is likely to only negatively impact the business for a 12 to 18 month period. As a result, SYD is currently trading at a forecast dividend yield of 8%, assuming a return to normal operating conditions in 2021.

“This is a very attractive yield, If you compare this against bonds yield which are at an all-time low. As soon as the virus and the outbreak are under control, these type of assets will come into favour again.”

Within multi asset portfolios, the fixed interest allocations have absorbed the fall in equities to some extent, while qualitative and emerging markets have outperformed in the global equities space.

Looking ahead, earnings per share across the market are likely to decline by about 15% this year, with the final extent of the fall dependent on the time frame it takes for the pandemic to be under control.

“We are seeing some fantastic value opportunities emerging in the market. We are looking at upgrading the quality of holdings in our portfolio so it is positioned well for the rebound.”