Coronavirus: stock up on quality companies

-- | 06/04/2020

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Glenn Freeman: We're talking about how the coronavirus has affected various sectors around the world. But we're starting off – we're looking at Australia. And I'm joined today by Johannes Faul, one of the directors of our equity research team here in Australia.

Johannes, thank you very much for your time today.

Johannes Faul: Hi, Glenn. Thanks for having me.

Freeman: We'll jump straight in. Why does Morningstar have the view that the hit to share prices is only going to be short term?

Faul: Yeah, that's a good question, Glenn. Look, we believe that there's going to be severe downturn and we're already feeling it today. But we think that the global economy is going to be impacted severely in 2020 by all the measures we see that have been put in place by governments globally as well as obviously in Australia. But that a treatment for the coronavirus will be available by the end of 2020 and really take the edge off the fears around corona and the healthcare system running at full capacity. And then, in 2021, by the end of that year, we basically see a vaccine arriving. So, with that in place and the coronavirus contained, we see that no longer as an overhang. And at the same time, all this monetary easing that we've seen is immense. And those are enormous, enormous tailwinds for, first of all, to see us through this hit, this severe impact that we see in 2020 for businesses to survive, but then also, everything said, all signals are in green, so to speak, for the economy to really bounce back strongly from 2021 onwards.

Freeman: Talking about the stock levels specifically, there's obviously the list of companies that are undervalued has really swelled in recent times. In terms of, in the global sense, there's 40 companies and I think it's 10 Australian. And I just want to make the point there for our viewers that to get that report, if you're a Morningstar subscriber, you can get that. What are some of the sectors in which you're seeing the most value at the moment?

Faul: So, heading into this, Morningstar, globally, on average, so to speak, we're turning from being bearish to being bullish. There's a lot of value emerging. And on balance, we see more buys than sells globally and in Australia, in terms of our stock coverage. So, there's plenty of opportunities for investors to get – to add to their screens to have a closer look at. In this specific report, we do highlight 10 names. But that's just a small fraction of the global coverage that we have and also the Australian coverage that we have. We believe that the sectors I should say that were hit the hardest, and that's energy and also consumer cyclicals, that's where most of the opportunities have arisen. And the reason being why we don't share the market's view – and obviously, the market has sold down these sectors significantly. The reason why we don't share that is, we just believe the market is extrapolating the current environment, this really pessimistic outlook near term, too far into the future. And again, this is where Morningstar's investment approach comes into play where we analyze and model long-term cash flows on each company we cover, and we look through the short-term disruption and really valuing the long-term prospects of each individual company that we cover.

Freeman: Johannes, how are some of the most defensive sectors holding up, the utilities or listed property, for instance?

Faul: One of the standouts really globally has been the utility sector that has held up quite nicely. Nevertheless, for the first time in a while now we see value emerging internationally in the utility sector. So, a sector that we thought was fairly valued or overvalued for a long period of time, we're seeing now pockets of value. So, look, different sectors, different industries have quite held up differently, but we see the greatest value and the greatest discrepancies really arising in those heavily sold-off sectors. And those oil prices right now, they're unsustainable in our view. They can't hold for a very long period of time, because (indiscernible) producers, the U.S. shale producers just can't justify drilling more wells very far below, call it, $60 or $55 Brent.

Freeman: Thank you. We'll leave it there, Johannes, some positive news to wrap up with. So, thank you very much for your time today.

This report appeared on 2021 Morningstar Australasia Pty Limited

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