The Magellan Financial Group Ltd (ASX: MFG) share price has lifted by more than 10% on that back of an update this morning, which outlined its views on the economic effects of the coronavirus pandemic and its investment strategy going forward.
Magellan’s funds have been punished during the downturn along with the broader share market. Shares in its Magellan Global Equities Fund (ASX: MHG) have fallen from above $3.80 to $2.84. The Magellan High Conviction Trust (ASX: MHH) was trading at above $1.70 in February and is now changing hands at $1.18. The Magellan Global Trust (ASX: MGG) is down from $2.15 to $1.37.
Magellan advised that the most likely outcome of efforts to contain the coronavirus pandemic is a near total shut down of the world’s economy. This is likely to lead to a collapse in demand for many businesses. Magellan predicts this could prove fatal for many small businesses and businesses that are highly leveraged or have high fixed costs.
The outcomes could range from a sharp v-shaped recovery in the best case, or a prolonged recession in the worst case. Which of these outcomes eventuates depends on the scale and effectiveness of fiscal and monetary responses from governments and central banks. Countries such as Australia, the UK, and the United States are in a strong position to respond to the crisis.
Magellan has taken steps over the past week to increase the defensiveness of the Global Equity strategy and has increased cash in the strategy from approximately 6% to approximately 15%. Cash is held in US dollars. Magellan also holds investments in businesses that are likely to prove resilient. These include US utilities companies and a US-based telecom-infrastructure company. Investments also include 3 consumer staples (Nestle, RB and PepsiCo) and Swiss-based pharmaceutical company Novartis International.
Magellan says its technology investments are likely to be resilient in this environment. These include Microsoft, Germany’s SAP, and China’s Alibaba and Tencent. It says its technology investments with more cyclical exposure (Alphabet, Apple, and Facebook) are well positioned to weather any downturn due to their financial strength and are likely to participate strongly in a recovery.
Magellan has advised that its luxury holdings (LMVH of France and Estée Lauder of the US) have solid balance sheets and source around one-third of their sales from Chinese consumers. Magellan thinks China is one of the best-places economies to recover from the current situation, which will also benefit its holdings in Alibaba and Tencent.
Magellan’s 3 restaurant companies (McDonalds, Starbucks, and Yum! Brands) are facing a challenging situation over the next few months as the world moves to shutdown. Post this slump in demand, however, Magellan believes these companies will recover strongly and prove defensive in the face of an economic downturn. Magellan has acknowledged that these businesses will be severely impacted but remain of the core opinion that they are some of the best businesses in the world and are likely to rebound when the virus passes.
The Magellan strategy holds no or few investments in businesses that are most vulnerable to the crisis. It holds no banks, airlines, travel-related companies or property trusts. There is no direct exposure to emerging economies, other than China, and indirect exposure to other emerging economies is modest.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.