Mark Freeman, AFIC CEO, reflects on the FY20 ASX reporting season and shares insights into what it means for AFIC shareholders.
The recent FY20 ASX company reporting season reiterated several fundamental principles for AFIC, maybe most importantly that despite disruption and volatility in economies around the world, quality companies have delivered better quality results and in many cases have been able to grow market share through these difficult times.
Our guiding investment principle has always been that quality companies are attractive long-term investments and we remain committed to seeking out and holding high-quality companies that can lead the economic recovery. We are pleased to observe many of the companies we have holdings in have not just weathered the turbulence of 2020 but have in fact come out stronger.
How have markets responded?
The recovery of global markets in the lead up to the FY20 reporting period was astonishing.
After a record sell-off in March, we are seeing many key world markets already approaching and sometimes surpassing the highs reached in February, and once again it is high-quality companies that are demonstrating the most resilience through this crisis.
It must be recognised that the recovery in markets does not holistically reflect the current state of global economies, particularly the Australian economy. Many businesses here are unlisted small to medium-sized enterprises (SMEs), which have taken a significant blow to revenue and are still facing challenges.
Although there is still uncertainty in the economy, we are pleased to see equity markets showing growth.
Much of the global recovery in markets seems to be driven by the turnaround in the United States markets. The NASDAQ has recovered so well since the sell-off in March that it is now 10 per cent higher than the peak it reached before the outbreak, and the S&P 500 has already surpassed the highs reached in February.
Fortunately for the US, technology stocks now form a significant portion of its markets and many technology companies have been able to sustain growth as they support a workforce increasingly dependent on technology. With the pandemic creating a shift in the way we work, technology companies that support the flow of business may be positioned well to maintain growth.
There were also other key sectors that defied the downward trend by providing products and services that remain essential through this crisis. Healthcare has shown continued strength as the demand for healthcare services grows in wake of COVID-19 and we saw one of our largest holdings, CSL Limited, recover quickly after the sell-off. Following suit in healthcare was ResMed and Fisher & Paykle which are also significant investments in the portfolio and have benefitted from this environment.
Shares in consumer staples, such as supermarkets, grew rapidly and reached record highs following the downturn in March as Australians were forced to stay home, contributing positively to AFIC’s result. The renovation market has also grown in both the US and Australia which strengthened revenue for some companies we hold such as James Hardie and Wesfarmers. We’ve also seen positive signs that China is turning back to infrastructure spending to maintain growth ambitions and our positions in the iron ore sector have been rewarded.
Some industries still facing powerful headwinds
Although the current environment has created opportunities for some industries, many have been impacted negatively by the outbreak of COVID-19.
The travel industry has obviously been hit very hard although are now looking to bounce back from the extreme low points. AFIC fortunately does not hold strong positions in many companies that depend on travel outside of airports.
AFIC did participate in a capital raising for Auckland Airport, which has bounced back quite strongly. We believe essential infrastructure such as airports that are managed well in high-quality economies, will eventually see a strong recovery.
Australia’s banking sector is still highly volatile and remains intrinsically integrated with the domestic economy and the SME sector. Until we see a broader recovery across all sectors of the economy the banks will likely remain under pressure.
Although the property trust sector has faced challenges, particularly those who invest heavily in shopping centres, our largest exposure has been Goodman Group. Fortunately, the company focuses on industrial property such as warehousing including developing space for online shopping businesses, such as Amazon, and as such its business has been very strong.
Quality management outperforms
It has been once again demonstrated that high-quality companies produce higher quality results in difficult markets, and many high-quality companies have improved their position as lower quality competitors have struggled to survive or maintain growth.
We believe as people gradually become more optimistic about a pathway out of the pandemic there will be cyclical bounces. However, we’re sticking with the businesses we think have strong market positions and can grow over the longer term.
In what we refer to as ‘owner-driver’ companies, where management has a significant stake in the company and a great understanding of the industry they operate in, we often see this long-term growth even as they move through difficult market conditions.
For example, we hold a position in a global freight company called Mainfreight and the founders still hold a significant stake in the company. They are passionate about providing a great service to customers, they hold a very long-term view and they are very patient in what they do.
In the Australian environment, there has been a lot of disruption particularly after the sale of Toll, but Mainfreight has used the current disruption of freight service to grow its position and customer base in Australia.
The current interest rate environment, with interest rates close to zero, creates a good environment for businesses to borrow capital and contribute to the economic recovery. Hopefully, investors that exited the market during the March sell-off will look to reinvest as markets continue to show convincing signs of stabilising, and we are confident that if the world finds a reasonable path out of this pandemic, we could see strong growth across sectors that have been the most impacted.
We will continue to carefully screen for quality opportunities to invest in as we navigate the uncertainty that we can expect from the markets in the short to medium term.