The case for our defensives
In early February this year we watched events unfold in Wuhan as the Covid-19 virus took hold. We were perplexed and alarmed by, what we believed, was a blasé attitude to the health risk posed by the outbreak. The economic impact on China was high, yet few projected this to the wider global community.
As a result of our concerns, we re-positioned our portfolio accordingly, reducing those companies we thought would be worst affected if the virus spread more widely and adding investments that would, in our view, be least impacted. We’ve highlighted, below, the rationale for some of our more defensive investments.
While the health and economic devastation wrought by the Covid-19 pandemic has exceeded our initial pessimistic projections, we still believe that markets are overly optimistic in outlook. The jury is still out on how quickly life can return to normal. However, we remain vigilant for signs that the wellbeing of our communities will return, which will be a precursor to a stockmarket recovery.
Going for gold
We’ve been interested in gold for quite a while now. Often seen as a haven, we view gold as a currency – one that’s sheltered from the devaluing effects of loose monetary and fiscal policy. Gold tends to rise when other forms of currency are debased, which is useful in the current climate. We express our view on gold through miners such as Newmont Mining and Barrick Gold rather than via metal ingots.
Telecoms: hidden depths
Telecom stocks are seen by some as plodding and unexciting. But they’ve shown how important a properly functioning telecommunications network is, amid the coronavirus confinement, in providing the vital services that allow more people to work from home. There has already been speculation that long-term working patterns will change as a result of the virus, a shift that would further increase reliance on these companies. In the meantime, regulators are realising the value of 5G infrastructure for economic growth. Traffic on telecom networks is forecast to surge, as more 5G devices emerge. Among our telecoms investments is AT&T which, under the watchful eye of an activist investor, has accelerated its plans to improve efficiency and enhance profitability.
The healthcare sector serves the needs of the population whatever the environment. Gilead Sciences was one of the companies added to our portfolio as we sought investments with resilience to the challenging economic backdrop. The company is a leader in anti-infective drugs, offering stable sales irrespective of the economic environment. We believed that the discount on which its shares traded relative to its sector peers was unjustified and, alongside its capacity to weather difficult markets, we see opportunities for Gilead to build its pipeline of promising medicines and to help in the fight against Covid-19.
Food retailers, including Tesco captured our eye a while ago. Historically a UK business, Tesco embarked on an unsuccessful bid to become a global retailer some years ago. At the same time, it lost price competitiveness in its core UK market. Recognising these missteps, management acted to return the business to its value-for-money roots, at which point we made our investment. Tesco is now back on the front foot and looks likely to emerge from these extraordinary times with some credit for demonstrating the importance of the food distribution networks.
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Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations.
Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this article should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.