It's no secret that the coronavirus pandemic has had an extremely negative impact on the S&P/ASX 200 Index (ASX: XJO) and the broader share market.
As of today, the ASX 200 is still down around 7.5% in 2020 so far. That's after falling more than 32% between 20 February and 23 March earlier this year.
ASX 200 shares are up more than 36% off of the March lows. Even so, one ASX fund manager sees further upside for at least some ASX shares.
Simon Mawhinney is the portfolio manager at Allan Gray – a contrarian-style fund manager. Rather than chasing the ASX shares like Afterpay Ltd (ASX: APT) that have already recovered strongly from their March lows, this fundie is instead looking elsewhere.
Mawhinney said the companies to watch were the ones trading at levels very close to, and in some cases below, their March 2020 lows. He said:
These companies have been affected by COVID-19. Their earnings are depressed, if they even exist at all. But this needs to be seen in context. The true economic impost for a company that would have traded at 20 times earnings, which loses one year of earnings in a market where things revert to normal after a year, is one-twentieth or five per cent of that company's value.
One area Mawhinney is not looking right now are companies with "a combination of operating and financial leverage".
That would include the ASX banks like Commonwealth Bank of Australia (ASX: CBA). Mawhinney sees the greatest downside risk with these companies, which he believes may face permanent loss of capital.
Can we take a lesson from this fund manager's views?
I think so. Many investors are, in my opinion, still giddy from the eye-watering returns that ASX shares like Afterpay and Zip Co Ltd (ASX: Z1P) delivered over April, May and June. Hoping for a repeat performance in the months ahead is wildly optimistic in my view. As Mawhinney puts it: "Our stock market strength is dominated by an ever-narrowing group of companies that have done extraordinarily well, but they are not the ones on which to focus."
I think returning to a long-term lens, as described by Mawhinney above, would benefit many ASX share investors today. It might be time for a value investing strategy along these lines to shine in the months and years ahead after a few years of growth investing-style dominance. Whatever happens, this sure is an unprecedented time to be navigating the ASX share market.
