Global Equities: What next?

As market volatility continues, discussion around whether the equity market is the right place to be seems to be increasing – should investors be looking at other investment classes or instead going to cash? We have clear thoughts on this:

    • The only sensible strategy for these times is to have a balance of exposures, to cover the many different possible future outcomes. In our view, this would include real income-earnings assets (such as property or equities), gold, and an amount of liquidity.
    • It is no longer possible to “de-risk” by going to cash. Financial distortions and government actions are becoming more extreme, increasing the chances of significant monetary problems. Cash holdings will only give investors more exposure to the banking system (not something we’d recommend at this juncture), and/or leave them unprotected in case of the return of inflation.
    • Continuing exposure to equities is without question a key component of any well-balanced portfolio. However, for some investors this may mean changing the profile of their equity holdings. Now is the time to hold lower risk equities – it is most definitely not the time for blanket market exposure. Investors should look to ensure that the companies they hold have the resilience to survive, and possibly thrive, through the extended difficult trading environment all sectors are likely to face – it has become painfully clear that the economic fallout from Covid-19 will not be short term.

Looking at the Kennox portfolio. Our 27 companies have the advantage of having faced their particular headwinds pre this crisis and of having taken the measures necessary to get themselves into battle-hardened shape – the shape that will allow them to survive and thrive in these difficult markets:

  • Sector leaders: The strongest, most resilient in their industry
  • Conservative management, with a long term focus
  • Low or no debt (many with cash on the balance sheet)
  • Delivering long term sustainable earnings
  • Undemanding valuations: Not dependent on high short term growth to meeting daunting market expectation

Some highlights that give us confidence in the portfolio’s resilience:

  • 16% in goldminers: Including Newmont and recently-added Newcrest. In times of monetary and fiscal uncertainty having high quality, diversified exposure to gold is sensible
  • 17% in telcos: Including China Mobile, Swisscom and recently-added Singapore Telecom. Resilient businesses pre-crisis, our telcos will benefit from increased “stay at home” traffic (home working/schooling etc.)
  • 11% in healthcare: Including GSK and Fukuda Denshi, which manufactures respiratory products (amongst others)
  • 11% in energy majors: Including BP and Shell. Very much out of favour, at 25 year low prices, all are well equipped to emerge stronger in an environment in which many smaller, weaker and indebted competitors will not survive
  • Low, targeted exposure to retailers: Our sole holding is Tesco, the UK’s largest supermarket group. As sellers of essential provisions, it should benefit from this environment
  • No transportation, travel or tourism exposure
  • Dividends: The Kennox Fund pays a well-covered yield of over 5% (after all fees)
  • Dry powder cash: These difficult times will produce excellent buying opportunities. We have our target list of sector leaders and 10% in cash, ready to pick them up at bargain valuations and hold for the long term

We believe that our portfolio can be used as an integral building block in any well-balanced portfolio shaped to meet the demands of the uncertain markets ahead.

Our portfolio can be accessed either directly through the Kennox Strategic Value Fund or, for larger investment, by segregated account. If you think we could be of help, please don’t hesitate to get in touch.

All data accurate as at March 19 2020

Click to View/Print PDF

Listen Now
MoneyWeek Podcast – Charles Heenan: Dominoes are Falling