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Market Update – 30April 2020 BY CLAY SMOLINSKIPlatinum...

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    Market Update – 30April 2020 BY CLAY SMOLINSKI

    Platinum International Fund current portfolio positioning is afunction of decisions taken over the last few weeks.

    Thebig question we are grappling with is whether we are seeing a correction (asmarket behaviour suggests) or if we are in a more troubling bear market. Thelatter tends to see changes in market leadership. We have not seen this changeyet with growth/defensives continuing to outperform – perhaps driven by evenlower bond yields, indicative of extreme risk aversion.

    Bearmarkets tend to coincide with deep recessions – high unemployment and otherunintended consequences – and high starting valuations don’t help. COVID-19 hastenedthe speed of the economic slowdown – the obvious victims were hit hardest. Fora bear market to materialise, the market favourites also need to be hit.Technology mega-caps are propping up market indices.

    Nearthe bottom of the market sell-off just over a month ago, we had started to addexposure. However, taking the US S&P500 as an example, almost two-thirds ofthe return from 23 March to 28 April occurred in the first three days and wewere not inclined to chase it higher.

    TheFund currently has a net market exposure of 70%, so it is worth consideringwhat would prompt us to increase this.

    Thereare two key things to look at – sentiment and valuations. After the sharprebound, sentiment does not reflect the challenges of our new reality – high unemployment and a lockdown that has struck at the heart of most developed economies, being the service sector and SMEs. On the valuation side, we want to own strong businesses with long-term growth trends that have been hit in the short term. These are, however, less plentiful than we would hope, with the market currently keen to completely look through any mid-term challenges many businesses will face. Removing our index shorts (approaching 10% of the Fund) provides a readily available lever to increase exposure quickly, should we see fit.

    Anarea we have been starting to carefully build exposure to is travel – along-term growth industry that will come back in time. In major sell-offswe always hope to add a group of out-of-favour stocks that increaseportfolio diversification and quality. We are not trying to time our entryinto beaten-up airlines, for example, but are looking at the building blocks,such as travel booking engines and aerospace. We have preferred toaccumulate new stock ideas rather than top up our oil-related capex investmentsfor now.

    Onthe short side, we are concerned about iron ore in the face of collapsing steelprices versus a market hoping for a China stimulus or a COVID-19 related mineshutdown. A collection of industrials priced for perfection (e.g. robotics,some expensive consumer staples and concept stocks) are also cause for concern.

    Themedical sector has the scope to change the probabilities around recovery pathsand we are fortunate to have a virologist, Dr Bianca Ogden, in the team.

    Biancanotes that our understanding of the virus as well as the disease it causes isincreasing day by day as clinical trials are initiated to treat the disease.The momentum is gradually building with clinical data becoming available -encouraging news on Gilead Science’s remdesivir trials, gives the market hope.Looking through the politics of the timing and the complexity of allocating thetherapeutics, we are edging closer to having a solution, with caveats aroundpatient type and timing of prescription. Data is also emerging for theanti-IL-6 antibody class (Sanofi/Regeneron's sarilumab and Roche's tocilizumab)showing how important it is to select the correct patient group.

    Onthe vaccine front, Moderna has moved to the next phase of testing, whileBioNTech/Pfizer have started to test their mRNA vaccine candidate in humans.China's CanSino is also progressing, rapidly moving its vaccine candidate intophase 2 as well as starting a clinical trial in Canada. Sanofi and GSK havejoined forces on the vaccine front with GSK providing the adjuvant.Manufacturing capacity for some of the vaccine candidates is already expandingdespite uncertainty about the effectiveness and safety of these vaccines.Testing also remains a key topic in the months ahead.

    OurEuropean portfolio manager, NikDvornak, notes that the economic impact of the lockdowns is becoming increasingly evident. Roughly 20% of the labour force is on various interim short-work schemes across the region, which preserve jobs via salary contributions. Some governments have started easing restrictions and the markets are rewarding cyclical stocks. The key questions are how quickly and effectively these 30 million employees can be re-engaged and whether we will see a ‘second wave’ of infections.

    Closerto home, in the Asia-Pacific region, Asia portfolio manager, Dr Joseph Lai, continues to see positive signs coming out of China as its recovery evolves at varying speeds across sectors, while India remains in lockdown. The majority of our Asian exposure is in China. We have reduced our net invested position in India to 0% in the Platinum Asia Fund as a temporary hedge against market risk (as at 29 April).

    Meanwhile,Japanese portfolio manager, ScottGilchrist, notes that the lockdown has continued to tighten up there. Investing in Japan is a balancing act between uncertainty in the near term and an attractive multi-year story. This week’s traditional Golden Week holiday will see few passenger movements given the current situation.

    Beloware the most recent portfolio exposures as at the close of business onWednesday 29 April 2020.


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    www.platinum.com.au/Insights-Tools/The-Journal/Market-Update-30-April-2020



 
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