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Coronavirus, a volatibility factor for investment markets

The experts from Trea Asset Management, an independent asset management firm specializing in management mandates for financial institutions, recently explained at a conference in Madrid their vision of the economy and the recommended positioning for investors, focusing especially on Spanish and European equities.

Coronavirus: brake on production

The first issue they addressed was the impact of the coronavirus, which has caused sharp falls in the stock markets, spreading fear among investors. In their opinion, the greatest consequence of the epidemic is the sudden brake that it can produce on demand, paralyzing the supply production chain, and emptying business inventories.

This scenario would be very dangerous for the economy, because it would reduce business profits, and would mean a high expense to restart the productive machinery. Because the later the coronavirus is controlled, the later the production will be reactivated in the companies, at a higher cost, and more risk of economic slowdown there will be.

From the point of view of investors, this situation can generate investment opportunities, given the increase in volatility. Proof of this are the falls of the Ibex close to 8% in just three sessions, which have left many stocks with good fundamentals at attractive prices. This is especially true of sectors related to the halt in supply: airlines, cars, textiles, industrials, etc.

Investment environments in Spain and Europe

The current macro scenario in Spain and Europe corresponds to the end of a rising cycle that is becoming excessively long, supported by monetary stimuli and high debt.

In Spain, passive management (replicating the performance of the indices through ETFs or other assets) has grown strongly, thanks to the fact that it is much cheaper to manage, and that the continuous rises in the stock market (the Ibex has risen by 70% in the last ten years) have provided returns without any effort. As an example, only four stocks in the Ibex were responsible for the 12% rise in 2020, excluding the last phase of the coronavirus.

However, the boom in passive management has led to a concentration of liquidity in the stocks included in the indices and a liquidity shock in those excluded, especially the small and medium caps. Although these stocks are supported by good fundamentals, they have suffered from the indifference of investors and therefore have a high potential track record as prices have fallen sharply. Given that corporate profits remain positive, this means new investment opportunities.

The ESG (socially responsible investment) factor has reinforced the effect of passive management, rewarding those companies that are environmentally sustainable, transparent and have good governance, compared to other companies in demonised sectors such as coal, for example. Investors are increasingly taking the ESG side into account in their portfolios, which also encourages the move towards value styles (companies that have good, solid businesses but are undervalued by the market).

As far as Europe is concerned, political uncertainties such as the Brexit, the trade war between the US and China, or the impact of increasing regulation, especially in the banking sector, have been a burden. As a result, the American stock market has risen more than the European one, thanks to the higher growth of the economy, the better corporate profits, and the monetary stimulus.

Where you find value in Spain and Europe

Against this background, Trea Asset Management experts identified a number of investment opportunities in Spanish and European equities.  Thus, they chose sectors of the future in which governments are investing: everything related to environmental preservation, connectivity (intelligent networks), health and the aging population, as well as pharmaceutical companies.

They also see value in utilities (energy companies such as electricity, natural gas, etc.), especially in renewable energies such as wind and photovoltaic.  They highlight the potential of rail infrastructures, a sector whose impact on the environment is low compared to other more harmful sectors such as air, automobiles or shipping.

Finally, disruptive technology companies (electric cars, digitalization, robotics, industrial automation…) are attractive because of their low PER, their ability to save costs and grow profits in the future, and because they are concentrating an increasing percentage of demand.

Another sector with is banking. Companies that have undergone a strong conversion and have been severely punished on the stock market – in the last ten years Spanish banks have fallen – 30% compared to 70% for the Ibex – have attractive valuations, such as a Book Value of less than 1 (their price is lower than their real value). Furthermore, they have not made any capital increases, avoiding dilutions in the price of the shares.

Finally, crude oil is another asset with a value for Trea AM. Because its price has fallen by 18%, and at current levels 30% of the companies in the oil sector do not make money, and 40% of new projects are not viable. Therefore, there is an increase in demand to correct this effect. In addition, the price of crude oil will not fall in the short term, because the world population will continue to increase, which will compensate for the lower expenditure on oil through the increased use of clean transport -electric cars, etc-.

Recommended position

With this scenario of positive corporate earnings, monetary stimulus, high debt, attractive valuations, and boom in passive management and ESG, the experts at Trea AM recommend an anti-cyclical investment positioning to take advantage of future changes in market trends. Positioning away from liquidity, focusing on Fixed Income in short term corporate bonds and companies with good fundamentals, and on equities, in small and medium growth companies, punished by the liquidity shock.


Javier Ferrer
Financial Communication Manager at Proa Comunicación

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