Market update – 9April 2020 BY ANDREW CLIFFORDThe last four...

Market update – 9April 2020 BY ANDREW CLIFFORD

The last four weeks has seen a rapid rebound from one of the sharpestfalls in market history and yet, in our flagship global fund, the PlatinumInternational Fund, we have remained conservatively positioned. Thisupdate explains why we remain comfortable with such a position.

The framework we have been using is that the removal of substantialamounts of labour as an economic input, due to coronavirus lockdowns, has had acatastrophic impact on economic activity, and that the market needs to be ableto anticipate a clear path back to work before we can contemplate a sustainedrecovery.

While some of the elements appear to be falling into place i.e.lockdowns are working to slow the spread, ICU capacity has been increased, andprogress made on an anti-viral, our sense is that while we have had a bouncefor now, we are not out of the woods.

In simple terms, the market has so far treated the events of the lastcouple of months as a correction (like the Asian crisis or European sovereigncrisis) and focused on a so-called V-shaped recovery. We have been managing theflagship portfolio as if we have fired the first warning shots in a bearmarket. Avoiding permanent impairment of capital remains a criticalelement of our investment approach.

Having taken swift action in late January when the virus impacted Wuhanand again in late February when it reached South Korea, Iran and Italy, onemight say that we missed the opportunity to meaningfully increase exposure whenthe market hit its 23 March lows. However, we would argue that the economyis damaged and we have still to work out how we pay for the stimulus. Whilewe did some buying near the lows, the sharp jump up in the first couple of daysleft us unwilling to chase the market higher.

With rates near zero at the start of this event, we have seen stimulusas the main response. This is a critical point; the cost of money tocorporates has risen as spreads have blown out, not fallen. This isnot helpful. In previous bear markets – the tech wreck and the GFC,interest rates were a tool, now they are a blunt instrument.

As longer term bond yields fell to all-time lows, the market hascontinued to widen the spread between so-called value and growth/defensivestocks; we have highlighted this gap for some time and our desire to avoidoverpaying for apparent certainty.

This recovery so far looks to us to be an expression of the ultra-lowbond yield, indicative of poor economic prospects, as opposed to a bet oneconomic recovery. Using equities as proxies for bonds seems odd to us –why not just lock in the sub-1% returns for 10 years that are offered with norisk from the US government, if one is so risk averse?

Through this period, we have been building increasing value intothe long side of the portfolio (adding for example, semi-conductors, travel,industrials and autos), and maintaining a relatively large short book – thisbecame more stock specific near market lows, using companies that have defiedgravity in preference to broader indices. In a bear market, the obviousareas get hurt first before the hotter parts of the markets sell-off later.

Some of the market moves off lows are quite spectacular (in localcurrencies) as this table below shows, with the US only 15% from all-timehighs. We note in the post-GFC recovery it took two years to get back tosuch a level.

To read the table e.g. Australia, from its peak on 20 February itdropped 37% to its low on 23 March; from its low on 23 March to 17 April (mostrecent figures) it has rebounded 21%; from 17 April (most recent figures) to themarkets peak on 20 February it has dropped 23%.

*MSCI All Country World Index

Wherewe are today, at a global level, we find it hard to see things get much morepositive in terms of the narrative about recovery, and while we would like todeploy more cash, and remove shorts, in time, we would likely need a pricesetback to entice us. Where this might differ is if we were to form astronger view that government intervention will simply lead to asset priceinflation, but we think economic activity is more important in drivingsustained recovery.

Itseems hard to believe that only a month on from lockdown, that the economies ofthe world are not impaired and that all stocks should have been punished, yet,for example, the technology heavy Nasdaq Composite Index, remains very close toall-time highs. That seems anomalous and a reason to be very wary.

Havinga virologist on the team and an intense focus on Asia as it emerges first fromlockdown, gives us a good insight into the key issues and comments follow fromour Health Care and regional portfolio managers.

Dr Bianca Ogden (Health Care) notes that the US, for now the epicentre of the crisis,continues to expand testing capacity, while several countries are debating howto include serological testing. Roche and Abbott both launched theirserological lab tests last week which will allow wider and more standardisedantibody testing. As economies re-open, testing and tracing will becomeparamount to identify local outbreaks early.

Onthe vaccine front, BARDA awarded Moderna a significant amount of money toaccelerate manufacturing capacity for mRNA-1273, while Sanofi and GSK havejoined forces to develop a vaccine. In addition, a new article highlightedGilead's remdesivir as having efficacy in patients recruited as part ofGilead's clinical trial. Caution, however, must prevail as these areanecdotal observations, with the real clinical trial data currently beinganalysed and due to be released very soon. We own Moderna, Sanofi andGilead in the global funds^[1] and Platinum International Health Care Fund.

Dr Joseph Lai (Asia) has been increasing the exposure in his portfolio,adding across the region. China continues to return to work and activity levelsare normalising (travel is weak but improving). Our focus is on adding tostrong companies, unfairly sold off. India remains in lockdown with newcases rising as testing ramps up (with a net invested position of 6% in thePlatinum Asia Fund as at 20 April). We are starting to see the chance toadd to good Indian companies at much lower valuations.

Scott Gilchrist (Japan) points out that the impact of the virus in Japan isslowly but steadily worsening and hence there is an increase in socialdistancing and remote working. At this time, the Japanese portfolio remainsconservatively positioned. Core holdings include many companies exposedto the digitisation trends that the virus appears to be accelerating: Nintendo,Nexon, Oracle Japan, GMO Internet and Cyberagent are example. Astellas,Eisai and Takeda are major components of the Platinum Japan Fund’s largemedical exposure. The medium to longer term investment case for Japan hasbeen clearly laid out over recent quarterly reports.

Nik Dvornak (Europe) observes that lockdown measures are successfullydisrupting the transmission of COVID-19 across Europe. Many countries arepreparing to loosen restrictions in early May led by Denmark, Germany, Austria,Switzerland and the Czech Republic.

Asper the global context, the European rally has been uneven as markets haverecovered some of the lost ground – simply put, businesses seen to be insulatedare back near previous highs and cyclicals remain close to lows.

Thekey uncertainties in Europe, as per the rest of the world, relate to the rateof new infections after restrictions are loosened and how quickly activityrecovers. This pace of recovery coupled with specific lockdown exitstrategies should be the key determinant of whether this gap narrows.

Belowwe publish the most recent portfolio exposures as at the close of business onMonday, 20 April 2020.

www.platinum.com.au/Insights-Tools/The-Journal/Market-Update-21-April-2020