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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 Moneysupermarket.com 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.


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Fundamental’s elephants are galloping fast

It’s been a big week of announcements from many of our portfolio holdings and some our large cap companies are putting their smaller peers to shame, delivering stupendous growth.

As the world’s largest online payments provider with the fastest growing mobile platform, Fundamental Ultimate Stocks Portfolio holding PayPal Holdings (US: PYPL) was bound to benefit. The fast-growing US giant added 37.3 million active accounts in the three months to December 2019, increasing its total customer number to 305 million. If PayPal keeps up this pace of growth, it won’t be long before it processes over $1trn of payments in a single year.

The rising number of AirPod wearers is reflected in the fact that Apple (US: AAPL) reported a 36% increase in revenues from its wearable devices business in the final quarter of 2019. Meanwhile, continued demand for the higher priced iPhone 11 drove sales higher at the company’s largest division with iPhone revenue up 8% to $56bn in the all-important Christmas quarter. The only disappointment in a record quarter for Apple was the services division, where revenue growth of 17% was below expectations and down from the 18% growth reported in the three months to September 2019. It’s incredible to think that 17% organic growth from a 40 year old company valued at US$1.4 trillion could be considered as being below expectations.

The data revolution to cloud hosted subscription-based services is already being reflected in the financial performance from long-term portfolio holding Microsoft (US:MSFT). In its fiscal second quarter to December 2019, the company reported a 14% increase in revenues to $36.9bn, driven by demand for cloud services across multiple product suites. Azure, the company’s cloud services and data centre platform reported a 64% increase in sales with cloud revenues now contributing a little over a third of total group sales.

It wasn’t all good news from our portfolio companies with results from UK listed Unilever (LON:ULVR) and Diageo (LON:DGE) hampered by the changing tastes of the modern consumer.

Diageo’s interim results reflect the trends of the wider alcohol market: consumers are drinking more posh booze, but less overall. Volumes were flat on the previous year, but net sales rose 4% to £7.2bn.

Changing tastes and price hikes were also an issue for Unilever where more than half of the 2.9% increase in revenues reported in 2019 was driven by higher prices. Like Diageo, demand for Unilever’s products is being upset by changing tastes of the modern consumer: the everyday cuppa is out, herbal tea is in. Thus, PG Tips and Lipton have joined the growing list of out-of-fashion brands which Unilever has put under “strategic review”.

Focus on the future stretches beyond the product portfolio at both companies. Diageo and Unilever recently topped the FTSE 100 responsibility index compiled by media group Tortoise, which highlights the main ESG (environmental, social and governance) investing principles.

You can read a full analysis of both Diageo and Unilever in the Ultimate Stocks Portfolio section of the Investor’s Champion website. Fundamental clients have complimentary access to the premium content on the site.

Contact Chris or Stephen at Fundamental Asset Management on 01923 713890 for information about our general investment portfolios, investing in some great global companies.