Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 357

How do you pick the right global stocks during Covid-19?

Over the past few months, we have entered a troubling time for the world. Lives are being lost, and most countries have entered varying degrees of lockdown. Most don’t have enough hospital beds, ventilators or medical professionals to deal with the pandemic and any spike in cases. The world as we know it has changed and the economic impacts are significant and difficult to quantify.

How deep is the recession?

We know that the world has entered a recession, but we don’t know the magnitude or extent. Economists are forecasting unemployment rates around the world will hit 10-20% over the next few quarters. The US has seen jobless claims rise to over 20 million, which implies an unemployment rate of 16%.

Fortunately, governments are stepping in with fiscal policies to provide varying degrees of unemployment benefits and wage support to companies, where employees are furloughed (forced leave). This will lead to a surge in government debt as trillions of dollars are spent, which will one day need to be paid back by taxpayers. In Australia, the government has announced $320 billion of support, representing 16.4% of annual GDP, while the US is providing a US$2 to US$3 trillion relief package.

The last time global economies looked this weak was in 1938. If you had asked me a few months ago how much would I expect the stock market to be down under this scenario, I would have expected a lot more than the current 11% decline in the S&P500 year-to-date.

Let’s not forget that the US market was trading at elevated valuation multiples before these declines. European markets have been some of the hardest hit, with the French CAC down 25% year to date, and the UK FTSE down 23%. Australia’s All Ordinaries Index is in the middle of the pack down about 18% this calendar year.

Stock market rejoicing in liquidity

The varying degrees of performance has more to do with the mix of sectors and stocks in each index than the economic impacts of the pandemic. The S&P500 is now more concentrated than ever with the top five companies representing 21% of the index. Microsoft, Amazon, Apple, Alphabet and Facebook have performed incredibly well over the past few months. 

Many of these companies benefit from the current situation of people staying indoors. Ecommerce is accelerating, benefiting Amazon, while Microsoft Teams and the growth of the cloud are supporting Microsoft’s businesses. Alphabet’s and Facebook’s businesses will be tested as it is hard to see advertising spend holding up in the current environment.

The difference between the current GCC (global consumer crisis) and the GFC (global financial crisis) is that the consumer represents a bigger proportion of GDP than banks and the financial industry did. So, when people stay inside and stop spending, this has a larger impact on incomes and GDP.

The second large difference is that while central bank rates were above 4% prior to the GFC, most central banks have started this recession around 2%. Central banks have shot every bullet they have in the past month, with the Federal Reserve cutting the fed funds rate to zero and announcing a plan to provide up to $2.3 trillion in loans to support the economy. They are purchasing $700 billion in US treasuries and mortgage-backed securities. This has flooded financial markets with liquidity, which has quickly found its way into equity markets.

Other central banks have taken similar steps with the Reserve Bank of Australia following Europe and Japan into a path of quantitative easing. So, we are at a crossroads where money is free and while fundamentals appear to be deteriorating the stock market is rejoicing in this new flow of funds and declining discount rates.

Positioning a portfolio

A few weeks ago, we suggested it may be time to invest in global stocks while hedging the currency back to Australian dollars. The Australian dollar had dipped below 60c to the US dollar but the interest rate differential between Australia and the US had disappeared. Furthermore, Australia has dealt with the pandemic exceptionally well over the past six weeks.

The issue we have in Australia is that we don’t have a deep pool of stocks in a variety of sectors. We have been adding to existing positions and buying stocks in essential service sectors. These stocks include technology stocks like Alibaba, which is the leading e-commerce and payments company in China, as well as the leader in the cloud. They are China’s equivalent of Amazon, but Alibaba trades on valuation levels that are half of Amazon. While most people have only heard of US large-cap tech stocks, we think the opportunity to buy high quality businesses trading at a discount to fair value is much greater outside the US.

Consumer staples stocks are also winners in the current environment. Woolworths and Coles are doing well. This phenomenon is similar all around the world. Proctor & Gamble recently posted its biggest US sales increase in decades, with US sales up 10% for the March quarter. In the months of March and April, packaged food sales around the world have been growing at a double digit pace.

The largest position in the fund I manage is Nomad Foods. It is a leader in frozen foods in Europe, with over 15% market share of the UK frozen foods market with brands such as Birds Eye and Aunt Bessie’s. They have also seen double-digit sales growth over the past few months as people eat at home more. Both Nomad foods and Alibaba also fit our criteria of companies with leading goods or services, managed by owner managers.

Healthcare is another sector that will continue to do well, irrespective of how the economy goes over the next year or two. Companies like United Health, a leading health insurer and technology provider to the US healthcare system, and Fresenius Medical, a leading provider of dialysis equipment and services for patients with chronic kidney failure, continue to deliver a steady stream of earnings and cashflow.

Watching for fear and greed

It’s important to accumulate stocks over the long term and buy when others are fearful. A month ago, there was a lot of fear and valuations were attractive. Now we see more greed despite economic fundamentals that are still deteriorating.

I think the biggest bounce will come from cyclical companies when we exit this recession, although it is not clear exactly when we will exit this recession. For the time being, the best plan of attack is to continue to accumulate quality companies in essential services, that are trading at attractive valuations. Investors should keep some powder dry for a reporting season in three months’ time, which will reveal how weak the economy really is.

Charlie Munger, Vice Chairman of Berkshire Hathaway Inc. and Warren Buffett’s long-time business partner, likes to say that one of the keys to great investing results is “sitting on your ass.” That means doing nothing the vast majority of the time but buying with aggression when bargains abound.

Berkshire Hathaway is also one of our biggest positions, and Buffett hasn’t really deployed the significant pile of cash on the balance sheet, which represents about 20% of their portfolio of companies and stocks. Munger was recently quoted in the Wall Street Journal as saying:

“Of course we’re having a recession. The only question is how big it’s going to be and how long it’s going to last. I think we do know that this will pass. But how much damage, and how much recession, and how long it will last, nobody knows."

 

Garry Laurence is a Global Equities Portfolio Manager at Perpetual Investment Management, a sponsor of Firstlinks. This article contains general information only and is not intended to provide you with financial advice or consider your objectives, financial situation or needs.

For more articles and papers from Perpetual, please click here.

 

RELATED ARTICLES

Amid a tornado of headlines, where can investors find opportunity?

Four ways to determine your international equities allocation

The case for a global small-mid cap portfolio

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Latest Updates

Planning

Will young Australians be better off than their parents?

For much of Australia’s history, each new generation has been better off than the last: better jobs and incomes as well as improved living standards. A new report assesses whether this time may be different.

Superannuation

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Investment strategies

A steady road to getting rich

The latest lists of Australia’s wealthiest individuals show that while overall wealth has continued to rise, gains by individuals haven't been uniform. Many might have been better off adopting a simpler investment strategy.

Economy

Would a corporate tax cut boost productivity in Australia?

As inflation eases, the Albanese government is switching its focus to lifting Australia’s sluggish productivity. Can corporate tax cuts reboot growth - or are we chasing a theory that doesn’t quite work here?

Are V-shaped market recoveries becoming more frequent?

April’s sharp rebound may feel familiar, but are V-shaped recoveries really more common in the post-COVID world? A look at market history suggests otherwise and hints that a common bias might be skewing perceptions.

Investment strategies

Asset allocation in a world of riskier developed markets

Old distinctions between developed and emerging market bonds no longer hold true. At a time where true diversification matters more than ever, this has big ramifications for the way that portfolios should be constructed.

Investment strategies

Top 5 investment reads

As the July school holiday break nears, here are some investment classics to put onto your reading list. The books offer lessons in investment strategy, financial disasters, and mergers and acquisitions.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.