Coronavirus encourages stock markets to take a breather

The indiscriminate sell-off in global equities due to the spread of the coronavirus has, not surprisingly, resulted in material weakness across Fundamental portfolios in the current quarter.

As is usual in these circumstances, the selling has been indiscriminate and even companies considered traditional safe havens have seen their share prices fall. Smaller companies as always have felt the brunt of the sell-off, as have those businesses most directly affected by the impact of the virus.

Diageo, the global drinks group and a constituent of our Ultimate Stocks portfolio, has warned how the virus is affecting its business with global sales now expected to be between £225m and £325m lower than they would have been otherwise. Though meaningful, that’s relatively small in the context of a business which generated sales of £12.8bn last year.

Apple, a long term portfolio holding, previously warned that it would fail to meet its quarterly revenue target of $63-67bn due to temporarily constrained supply of iPhones and a dramatic drop in Chinese shoppers.

Airline, hotel and leisure sectors have been hardest hit with the share prices of portfolio holdings easyJet, Dart Group, Hostelworld Group and Booking Holdings suffering material falls over the past few days. The proposed IPO on AIM of Meininger Hotels, a European hotel and hostel operator, could certainly prove challenging in the current climate.

Portfolio holding Walt Disney Co has also seen its shares slide as its theme parks in Hong Kong and Shanghai have been temporarily shut down. News that Bob Iger, its highly-regarded CEO of the past fourteen years, is also retiring sooner than expected (although he had already extended his stay) also came as a surprise.

Long term holding Microsoft is dealing with the outbreak by donating generously to the recovery efforts in China. That includes RMB 40m worth of products, services and solutions to equip frontline hospitals and medical workers, as well as providing free cloud services to mitigate the impact of the outbreak for businesses and students.

In the gloom of the stock market rout it was pleasing to see price comparison group report excellent results with a 9% increase in revenue and 10% increase in profits as it reaped the rewards of a diverse product offering. This business continues to display many of the characteristic we look for in an exceptional company.

At the smaller end of the scale, the share price of Ramsdens has also been particularly weak. This company has been enjoying strong growth from its foreign exchange offering which will clearly suffer in the short term as fewer people travel from UK. However, it will also be a beneficiary of the soaring gold price which has climbed to its highest level in seven years.

If there is one positive from the outbreak of the coronavirus, it is that global healthcare systems have been alerted to the need for better contamination control. It’s hardly surprising therefore, that the share price of legacy AIM portfolio holding Tristel, a specialist manufacturer of infection prevention and contamination control products, has climbed to new highs over recent weeks. While it could be a big long-term winner from greater investment in global infection prevention, the share price appears to have become a little over-heated. You can read a full commentary on Tristel’s progress from our associates Investor’s Champion here.

We remain happy with our selection of excellent companies, which will continue to generate growing profits and cash for many years to come. Contrary to what is implied by the current sell-off, they certainly haven’t all turned into bad businesses overnight.

With the US stock market having recently scaled all time highs, a pause in our opinion was long overdue and we view a correction at this point as beneficial to the long-term health of stock markets.

Equity investment should be viewed as a long-term exercise and, unless investors have a near term requirement for cash, see no reason to run for cover at the first sign of short-term difficulties.

We anticipate further weakness in global equities over the coming weeks as the coronavirus spreads inexorably around the world, as unfortunately seems likely. However, human nature is such that, when things ultimately settle down, people will be keen to get out and enjoy life once more. Where applicable, we will therefore look to buy and add to selective holdings as opportunities arise.


Why are UK investors reluctant buyers of US listed shares?

We are puzzled why many UK investors appear reluctant to acquire shares in some of the best known companies in the world, preferring to delegate responsibility to some mediocre fund manager via a collective investment vehicle, which often has hundreds of holdings, many of which are also mediocre.

The US stock market’s considerable outperformance of the UK market, over virtually any long-term time period you care to mention, appears to have gone unnoticed by many UK investors.

While the FTSE100 index of leading UK shares has risen 31% in the past 10 years, the US S&P500 index is up nearly 200%. We acknowledge that these returns exclude dividend income and the UK market has always offered a higher yield, however, even factoring in dividends, that’s a still a huge outperformance.

The FTSE250 of mid capitalisation stocks, which is supposed to be a better reflection of the UK economy, has ironically generated superior returns to the 100 index, climbing over 100% over the same period, however, this is still meaningfully lower than the US. Fundamental Bespoke portfolios have benefited from some wonderful mid cap success stories with Games Workshop, the designer and manufacturer fantasy miniatures, the pick of the bunch over the past few years.

If one is seeking to achieve superior investment returns it seems logical to fish in more abundant waters and the US market is stocked with a rich variety of fantastic companies, many of which will be familiar to UK investors.

Apple, the largest listed company in the world, whose products and services are ever-present in our lives, is one of the easiest companies to analyse and understand. Why wouldn’t you buy shares in a company whose product you have become so dependent on ? Microsoft is another familiar name whose software most people use every day but which bizarrely won’t be found as a direct holding in many UK equity portfolios. We appreciate the products and financial excellence of Apple and Microsoft, both of which have been long term holdings of Fundamental Bespoke portfolios.

Our new Ultimate Stocks portfolio aims to simplify the process of investing in great global companies, some of which are listed on the UK market, but the majority on the US and other well-regulated overseas markets.

The portfolio contains 25 companies, many of which are popular with their consumers and in high demand. We’re on the hunt for quality and real organic growth which can provide excellent returns for shareholders over the long term.

Investors in our Ultimate Stocks portfolio will benefit from holding shares in some fantastic global businesses, full visibility of holdings, minimal transactions and low fees.

To find out more please contact Chris or Stephen on 01923 713890 or email [email protected]