This morning leading fund manager T. Rowe Price released its latest Insights on Australian equities and revealed what it has been buying.
The company's Head of Australian Equities & Portfolio Manager, Randal Jenneke, also provided investors with some good advice on the way forward from here.
He explained: "Markets will recover when things stop getting worse, which relates to both the health and economic crises; the question is, when is that? The framework for our company modeling scenarios are based on three phases of the crises."
The three phases in question are the Containment, Hibernation, and Recovery phases.
Mr Jenneke believes that markets should recover at some point between the Hibernation and Recovery phases, pre-empting the recovery. This is likely to be once confidence grows that infections are under control.
The next big question for investors to consider is what shape this recovery will be.
Jenneke believes this will be a function of four variables: the length of the hibernation, containment measures, the size and duration of economic stimulus, and the psychological impact/behavioural change of businesses and consumers.
At this stage, though, there appear to be too many unknowns to answer this with conviction.
However, that hasn't stopped T. Rowe Price from adding to its portfolio during the coronavirus pandemic.
What has T. Rowe Price been buying?
Firstly, prior to buying shares the company was assessing its existing holdings and testing their balance sheets and liquidity.
It was looking for shares with the ability to withstand 3-6 months of little to no revenue. Those that didn't pass its tests were exited.
After which, it added the shares of medical device company Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), iron ore producer Fortescue Metals Group Limited (ASX: FMG), some unnamed tech companies, and language testing and student placement company IDP Education Ltd (ASX: IEL) to its portfolio.
Mr Jenneke explained: "The virus is creating strong respirator demand for Fisher & Paykel Healthcare, and Fortescue provides additional exposure to iron ore, where we expect iron ore to remain strong given China's steel-intensive stimulus."
"Fear clouds the market's judgement of quality, long-term growers. We increased our exposure to IT via potential long-term winners, as valuations sold off heavily. We also added IDP Education as it fell to its lowest valuation in over 2 years," he added.
What next for the ASX 200?
While T. Rowe Price expects sizeable earnings downgrades over the coming weeks and months, it sees plenty of opportunities for investors.
Mr Jenneke commented: "In light of the strong market rally from the March 23rd lows we are expecting a wave of capital raisings as companies use this window of opportunity to manage debt and liquidity risks. We believe markets have and will provide liquidity to the deserving, but not all companies will be so lucky."
"Expect big earnings downgrades – we all know they're coming, but how will markets react to the magnitude of downgrades some haven't seen in their lifetime? We expect more volatility but equally new opportunities," he concluded.
