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Rosanna Burcheri explains why company market calls offer a good reminder of the resilience of many companies and present an opportunity to gauge investor sentiment…
At times such as these, investors are often given the advice theatre producer Martin Gabel once pressed upon an actor who was over-gesticulating: "Don't just do something – stand there!"
But as an active investment manager, I am not sure I can remember ever being so busy. I would like to think that what I have been doing stands our investors in a better position.
Much of my time has been spent dialling into company market calls. I am interested in not just the companies we own but their competitors, as this gives us a broader picture.
These calls are organised by brokers and are open to professional investors. Sometimes companies organise them directly and then financial journalists may dial in.
They have become so popular recently that occasionally, I have been unable to get through because the operating systems have been overwhelmed.
The speakers tend to be investor relations personnel from within the companies. You might assume that their job is to encourage you to buy their shares and they are therefore trying to spin things positively. Actually this has not happened – no one is in the mood for any kind of spin. We want hard facts and useful insights.
On the whole, that is what we are getting, though there are limitations on what the speakers can tell us. They are a market for everyone.
So what can we learn? There are a number of things I am focused on.
I want to check the debt structure of the companies we own, as we try to avoid highly leveraged businesses. Dislocations such as what we are experiencing now can play havoc with debt exposure.
My big concern is for those firms with a triple-B credit rating. If they are downgraded then their cost of debt can rise significantly and that can suddenly become a problem.
Linked to this is cashflow. We like companies with good cashflow generation and this is where the risks are most serious at the moment, with the world going through what looks like a rolling three-month lockdown.
Most large-cap companies are big enough to have exposure to a number of market sectors.
Some have benefited from the crisis - for example, Tencent, the Chinese video game and social media company, has seen a rise in social media advertising during the Chinese lockdown and greater spend on gaming.
At the same time, general media advertising has been down.
Through these calls, we can learn what exposure firms have to things like travel reduction and, in the case of medical equipment provider Boston Scientific, to cancellations of elective surgery.
I am also interested in company cost structures - how much of the costs are fixed and what steps management are taking to reduce them.
One luxury brand company explained the challenge. Personnel represent 17% of the company's sales costs. The business can reduce bonuses, but it has to be careful in reducing headcount – it needs to retain its best staff to maintain its reputation and brand position.
Finally, these calls are a good opportunity to gauge the mood. All investors are looking for the bottom of the market and that is never clearly signalled. You have to read the runes and sense it.
There have been occasions when I have come away feeling reasonably positive. During a call last week with Tencent, for example, the company reported full-year numbers and walked us through a mixed picture – although a journalist on the call focused mainly on the gloom.
My own feeling is that the news flow is no longer all negative. Companies in China – or with offices there – are reporting that things are returning to normal. 80% of LVMH's Chinese stores were closed a few weeks ago, but 80% are now open.
Traffic is returning, though we have still to see the jams of before. Manufacturing capacity is being restored and companies are encountering fewer supply issues from that quarter.
Multinationals are grappling with the monetary and fiscal measures announced by governments around the world – how these will be implemented in reality and how this will affect their businesses. Naturally, there is also anxiety about how big and deep a human impact this virus will have.
These calls will not tell us when we have hit the bottom of the market, but they do remind us that companies are resilient.
Some are seeing this as an opportunity to make acquisitions.
Many have been around for decades and survived crises as bad as or worse than this.
Overall, these calls leave you feeling more optimistic about the world.
Things will get back to normal – at some point. Whether it is the same normal, of course, is a different matter.
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