We hear repeatedly that these are unprecedented times – that covid-19 represents a ‘once in a century’ occurrence.
But what if this phenomenon doesn’t pass as quickly as expected? Or that another virus equally as economically devastating spreads worldwide?
Will governments be able to repeat emergency bailouts?
Only this week we saw the European Commission agree a €3.4bn bailout for the airline KLM.
You could argue that KLM is an exceptional case, given the company’s importance to the Dutch economy – the airline is the Netherlands’ second-largest private employer with over 36,600 employees.
Does a bailout of this kind change the investment case for firms that receive such aid?
To a degree yes, is the response from Dutch asset manager APG.
“Each type of bailout will be assessed carefully, especially in the light of shareholder- and stakeholdership,” a company spokesman told Expert Investor.
He added: “We evaluate our investments on an ongoing basis so if a bailout could happen we will definitely reassess our investments. This is by no means saying that we exit an investment, but it does force us to reevaluate our thesis.”
Covid impact
There are many well-run companies in sectors that have been decimated by covid – events companies that have had no business at all; education establishments that have been forced to close their doors; retailers that have literally shut up shop.
Many manufacturers have seen a major slump in orders and in many cases have closed plants to prevent the spread of infection.
Are bailouts – whether on the scale of KLM or smaller and in different sectors – sustainable or repeatable longer-term?
It is not a question that is easy to answer.
According to APG, we are in unknown territory so trying to predict how support packages will look in future is difficult.
“Given the novelty of the events and the financial assistance provided by governments is all very new, it is hard to speculate how future assistance might look.”
Foppe-Jan van der Meij, senior portfolio manager fixed income credits at Actiam, makes the point that airlines, like KLM, are in a particularly vulnerable sector at times like these and while bailouts of the magnitude might be rare at the moment, in a crisis as unpredictable as covid we may see similar cases in future – and across other sectors.
“Companies like KLM, Lufthansa and Air France have suffered huge declines in flight numbers and these airlines cannot be saved purely by fiscal stimulus – they need loans and commercial banks are not prepared to give these loans.”
Hence the EU providing the essential liquidity.
And van der Meij thinks there is little choice but to do so as national airlines are essential.
“It is not just support for the airline (KLM) and the economy but also to social impact. It is incredible just how many companies and people are dependent on Schiphol Airport.”
His expectation is that smaller airlines will struggle to survive while the largest will be kept alive. He also does not rule out similar scale bailouts in other industries – assuming we don’t get back to normal soon.
“Travel and leisure companies have been hit hard and so too has the automotive industry. In April, we saw an 80% decline in car sales in Europe. Car manufacturers have received some support from government but they may need much more in future.”
Sector preferences
So, are asset managers now wary of committing money to the aviation/travel/events sector?
The thinking has changed to some extent, according to APG.
“We always evaluate our investments within a portfolio context. For us, this means that historically strong growing sectors such as travel and aviation offered attractive valuations at a higher risk to us.”
The spokesman added: “Going forward we still think that people will travel and go to events, but the growth that we have seen over the last decade will take a pause. This does not mean that we will not commit to these sectors going forward, but they have to fit within our framework.”
Actiam’s van der Meij thinks that, to some degree at least, there has been a reversal (at least temporarily) to what asset managers view as high and low risk sectors.
For instance, some portfolios are now structured with technology stocks included as ‘defensive’ names.
While van der Meij can see the thinking behind this he believes there is still a need to understand the fundamental strengths of a company outside a covid context.
“Yes, there are traditionally defensive companies such as European Toll Road operators that have been viewed essentially as utilities. However with no money coming in, the risk/return balance is different. But in the end, from an investment perspective, these companies are still important to the country and totally necessary.”
Hendrik-Jan Boer, head of sustainable and impact equities at NNIP, insists that the market turmoil related to covid has had no discernible impact on his overall perspective and approach to stock selection.
“We still screen for the same qualities, both in terms of financial strength and ESG criteria. Ultimately, we’re looking at the key trends that we expect to develop, and which companies are involved in these value chains – especially if they have a solid track record of adapting to market changes.”
The team also assesses how companies behaved in former crises, such as the global financial crisis, to get a feel for whether they are running the risk of bankruptcy if disaster beckons, or if a downturn might present opportunities.
“If a company can survive disaster, it can probably also benefit by grabbing market share from other companies that have folded.
“Right now, many of the long-term trends we’re exposed to are accelerating,” says Boer, pointing in particular to companies related to medical analytics and online communications. He cites Microsoft as an example – clearly benefiting from stay-at-home measures with a huge increase in cloud usage over recent months.
Boer argues that this simply reflects a continuation of themes that were already evident, such as the trend of businesses becoming more asset-light and enabling remote working.
