Including infrastructure in portfolios – listed vs unlisted
Client Portfolio Manager Marc Bindschädler gives an outlook and positioning for Sustainable Emerging Markets Equities.
The mtx team has lowered their earnings estimates for all portfolio companies in several steps using different scenarios for the magnitude and length of the economic impact of the Covid-19 outbreak. This is an ongoing process, which will most probably result in further adjustments to earnings estimates.
That said, there were relatively few portfolio changes. The team’s focus on companies with strong business models and leading market positions was helpful, as was the country and sector positioning.
Asian companies might be able to cope quite well with the current situation thanks to their healthy balance sheets. In comparison to European and US companies, the cash-to-market-cap ratio of Asian companies is twice as high. These factors could argue in favor of investing in Asian equities, despite the companies’ high export dependency. This holds true regardless of the fact that analysts’ downward revisions of corporate earnings in Asia will be more pronounced than in the US and Europe.
Relative performance is holding up well in March with the Vontobel Fund - mtx Sustainable Emerging Markets Leaders outperforming the benchmark.
Stock selection contributed most to relative performance while the sector allocation effect was positive too. From a country perspective, the overweight in China helped, as did the underweight in India.
We currently do not expect portfolio companies to cut their dividend payments for 2019, unless the health crisis worsens. The portfolio companies are highly cash generative and have almost no outstanding debt. Some of them would even be able to pay higher dividends but prefer to invest in future growth instead.
The market currently prices in an earnings decline of 20%. Whether this will occur depends on how soon authorities will lift measures to rein in the virus spread.
To what extent ESG performance – one of the four pillars of the mtx selection process – will hasten a company’s recovery is hard to tell. It may be that companies heeding ESG standards will be able to come out of this crisis quicker, or better cope with structural changes. But this will become visible in a few months from now.
Any change in global supply chains may take longer than many people now expect, especially for high-tech goods. One important change is the likely shift to higher inventories as the crisis has tarnished the concept of just- in-time production. Such a move should lower earnings margins here and there.
The mtx team is constantly looking at new portfolio candidates. Some high-quality companies that it has been following for some time but always considered too expensive could now be interesting from a valuation perspective.
Period covered: 24.03.2020 to 02.04.2020