Investor update: 7 April 2020

Building the bridge to post-COVID-19.

The week that was: Building the bridge to post-COVID-19

Volatile and changeable times

Looking back over the last week, we saw a rapid increase in the number of U.S. Coronavirus infections, New Zealand is amidst a stage four lockdown and their banks are holding off on paying dividends. On a positive note, we saw various markets stabilise slightly, for now.

Locally, Australia entered stage three lockdown with beaches, playgrounds and outdoor gym equipment shutdown and social gatherings limited to two people.

‘Stay home, save lives’ signs have appeared everywhere in a bid to flatten the pandemic curve. The message is being heard as we saw substantial drops in toll road traffic last week and the usually bustling high streets of our cities and towns fell quiet.

Policy makers faced the challenge of steadying the weakened economy with numerous initiatives announced locally from the $130 billion dollar JobKeeper program to keep people in work to free childcare. From a monetary perspective, central banks around the world have stepped up to the plate and are providing support hoping to inject as much liquidity into the market as possible.

Measures were implemented for businesses and households to reduce their debt repayment burden with help from both the Reserve Bank of Australia (RBA), the Government and major lenders.

What will it look like on the other side of the bridge?

Last week, the Australian British Chamber of Commerce hosted an economic briefing with Paul Bloxham, Chief Economist, HSBC Australia, exploring the question: once we exit this ‘economic hibernation,’ what will the post-COVID-19 world look like?

Off-the-back of this, some questions to consider are:

● What is the future of airlines and is the Government going to purchase Virgin Australia?

● Will there be less demand for office spaces due to the possibilities of remote working?

● Can retail move completely to online? And what does this mean for commercial rents?

In 2019, nearly a third of Australian exports went to China* and the likelihood that the country will start pulling the lever on more infrastructure is promising due to their recent re-opening of factories.

Bloxham raised the point also that another shock absorber for Australia could be that that as a nation of travellers we may spend more inwardly this year, once the inter-state travel restrictions are uplifted.

U Ethical’s defensive position stands us in good stead

Some positive data has been released last week from our investment team. Notably, that our performance is promising relative to benchmarks due to our decision to act defensively in the face of uncertainty. A more detailed update is below:

● Despite a tough March, performance is favourable relative to benchmarks: U Ethical’s Australian and International equity portfolios have both outperformed the benchmarks across the month, year to date and 12 months.

● Earnings forecasts are slowly adjusting: We continue to see downgrades to income estimates and an increasing number of companies withdraw profit guidance due to the uncertainty of the COVID-19 impact. This is also evident with a number of companies deferring dividends to help alleviate cash flow pressures.

● Unlikely to have reached a market bottom yet: While consensus earnings have been reduced, we still see them as too high given the ongoing risks and uncertainty leaving valuations on the expensive side.

● Defensive position still warranted: With all the ongoing risks to the global economy we continue to hold high levels of cash in all equity portfolios and add to defensive exposures in the portfolio where they are reasonably priced. We will continue to look for attractively priced stocks while reducing exposure to risk.

We’ll leave you with a quote from our Chief Executive, Mat Browning:

“There is a lot of crisis management at the moment, but we also need to think of the broader market and the post COVID-19 landscape. Not just in terms of our financial long-term goals, but also whether we are adhering to our ethical values during this uncertain time.

One thing is for certain, that no matter the circumstance, U Ethical will remain true to our core corporate values and remain dedicated to providing better investments for a better world. Creating our positive impact as U Ethical continues to make a difference by:

1. Being a social enterprise; donating our operating surplus to community contributions.

2. Continuing our active ownership; keeping corporates honest and held to account.

3. Not only negatively screening our portfolios to eliminate sectors bad for society, the environment and our community, but positively tilting towards those that do good like healthcare and education.

Once we cross the bridge and enter the post COVID-19 landscape we will be well equipped to support our wider community by investing in ethical industries – a time when support will be critically needed both locally and globally.”

Kind regards,

David Brennan, Director - Distribution

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