Even though 2020 is a leap year, I do not think many people will have been glad of the extra day in February. It has been a fairly miserable month; storms have raged, locusts have swarmed and coronavirus is causing pandemonium. You could be forgiven for thinking it is the end of days.
I am not a virologist, but it would be remiss of me not to comment on the biggest driver of the market at present… heavy pinch of salt advised.
Coronavirus has proven difficult to isolate, despite significant prevention measures. However, it is the economic impact of measures taken to reduce contagion that are starting to have a real impact – economic growth requires people to be mobile, social, interactive and ideally not terrified; it’s hard to do this when you are in quarantine.
In the final week of February, the market decided to get scared too. It has sold off aggressively, with the FTSE All-Share down c.8-10% in the last 5 days of the month. The sell-off has been a mix of obvious targets like airliners and materials stocks, but has also included housebuilders and computer game companies where the direct impact is less clear – if you’re stuck inside all day then video games would surely be a welcome distraction! It has felt like some investors have taken the opportunity to sell out of anything that’s done well.
The end game of this is difficult to call and the tail risk of mass infection is ugly. At the moment it is the human response that is creating the biggest risk. Containment measures are constraining economic activity, which is impacting revenues and cash-flow for many companies. If this continues for an extended period, it may create a liquidity squeeze, as companies struggle to service their debt. My belief, is that if transmission rates come down, due to seasonal factors or successful containment or any other factor, there will be a rebound in economic activity boosted by fiscal and monetary support.
The narrative will get worse as the virus hits new regions and major cities, I think for long term investors this should not derail your view of risk assets. We are certainly keeping our eye on stocks that have fallen precipitously, but have good balance sheets and should be well placed in a recovery or have long term attractive fundamentals that we can now buy cheaper.
The Long
Wizz Air. I could look back on this and feel very stupid. Wizz is a Central & Eastern European (CEE) based airline. In the last 15 years CEE flights per capita have gone from 0.1 per person to 0.5 per person, in Western Europe it is two per person. If it gets to one flight per person in 10 years this is a 7% CAGR. I have to believe that air travel will return to normality in the next 6-18 months. In the current environment, when flights are being cancelled and load factors are plummeting, it is the highly leveraged and inefficient legacy airlines that go bust. Wizz has €1.6bn (£1.1bn) of cash on the balance sheet and is very cost efficient. This will help them to weather the storm and be well positioned to benefit from a less competitive but fast-growing market when the clouds clear.
The Short
Eddie Stobart Logistics. The shares of this haulage company were suspended in August to give the company time to reassess its accounting after the board found some discrepancies. In February the company updated the market on their results and returned to trading. The losses and debt were worse than expected driving the share price down 90% on the return to the market. We put a small short on in June 2019.
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