Tom Young
The Australian market might feel like a bloodbath now, but for me, it’s been a long time since I’ve seen so much value in the market for those who can hold their nerve.
COVID-19 has, rightly, made governments around the world sacrifice economic growth for the preservation of human health. This has sent society into an untested spin – who could have ever imagined that planes would stop flying, the 2020 sporting year would be all but cancelled, and we’d be confined to our homes for likely all of autumn.
Markets have been equally volatile, though amid the volatility now we are seeing some gains, not just tumbles. However, it’s important to remember this is a true black swan event, not triggered by anything fundamentally wrong with the Australian economy. Australia has come into this crisis with relatively low debt compared to global counterparts and a strong fiscal position1. Recovery will likely return the economy to its regular operations, and we believe hindsight will show many good companies, which can trade through this, would have been a great buy.
In this piece we take a look at some household favourites, with an allegiance to the view that this market disruption is temporary, and decisions should be made on long-term goals and fundamentals: strong balance sheets, robust business models and sustained demand beyond COVID-19.
The telcos
After going through a rough patch with headwinds from the NBN rollout, we believe the telcos are in a stronger position now than they have been for the last few years. In fact, we have been progressively increasing our exposure to the sector since the middle of 2019.
In the COVID-19 outbreak, telcos are an essential service, and they’re facing a surge in demand as households look to boost their coverage and data packages to suit their working needs2. Some have, for example, offered free data packages in an effort to boost the capacity of mobile users and households3. It fits well into the ‘Team Australia’ mandate from Prime Minister Scott Morrison.
Longer term, some are positioning themselves to capitalise on the 5G network, as an alternative to the NBN. AMP Capital has written about the transformative potential of 5G extensively, including here, and can see a competitive advantage for telcos which are able to provide a superior service to the NBN4.
Dividends looking shaky
My colleague Dermot Ryan, co-porfolio manager for Australian equities, penned this piece explaining why dividends could be cut by at least a third in the next twelve months, leading to a larger cut to aggregate dividends than we saw in the GFC.
In our view, it’s going to be very hard for any company receiving significant federal and state aid to also maintain their previous levels of dividend payments to shareholders. The banks are in that category, and it’s reasonable to expect there will be pressure on their dividends.
Some may be fearing a similar scenario to the UK, where British banks have suspended dividends in the face of COVID-195. Indeed, APRA recently wrote a letter to the Australian banks asking them to make “prudent reductions in dividends”6 While the short-term outlook for bank dividends is impossible to lock down, it’s important to remember that about a third of ASX 200 dividends come from the banks7, meaning the government would realise how important those dividends are for retirees. While that will likely provide some support to near term bank dividends, we believe it’s prudent for retirees relying on dividend income to ensure their dividends are adequately diversified.
Where to from here?
My view is that, when this crisis is over, many will look back on the domestic market and recognise that there were buying opportunities. As we’ve said, companies with solid balance sheets which can trade through this are in a good position to take advantage of the inevitable rebound – and currently, those companies are probably a lot cheaper than they were two months ago.
It’s important to remember markets will always climb a wall of worry. Conditions will ease, and investors with their eyes on the long-term will want to be as ready as they can to be for the market recovery.
1 https://www.afr.com/policy/economy/mega-stimulus-to-test-australia-s-aaa-credit-rating-20200319-p54bnr
2 https://www.afr.com/companies/telecommunications/nbn-telcos-prepare-for-unprecedented-demand-20200315-p54a7h
3 https://www.itnews.com.au/news/telstra-follows-optus-with-extra-mobile-data-in-virus-response-539389
4 https://www.afr.com/business-summit/telstra-warns-nbn-will-lose-customers-as-it-enters-wireless-battle-20200311-p54902
5 https://www.forbes.com/sites/stephenpope/2020/04/01/british-banks-will-suspend-dividends-so-shines-a-good-deed-in-a-weary-world/#6d7c390668f1
6 https://www.apra.gov.au/sites/default/files/2020-04/Capital%20management.pdf
7 AMP Capital, Factset
Author: Tom Young, Co-Portfolio Manager (Income), Australia
Source: AMP Capital 16 April 2020
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