(Bloomberg) -- Australian supermarkets and real estate stocks may be the best way to play defense amid uncertainty surrounding the spreading coronavirus.
That’s the view of Lachlan Davis, who leads IFM Investors Pty’s large-cap active equities team that’s been buying Coles Group shares and A-REITs. He’s also shorted Flight Centre Travel Group Ltd., discretionary retailers and gone underweight Qantas Airways Ltd. and banks as the Melbourne-based fund manager waits for clear signs concerns have eased.
“There’s still a lot debate on how bad it’s going to be, how much of the world is going to get it and whether it’s containable,” Davis, who manages about A$1 billion ($660 million) of Australian stocks, said in an interview in Sydney. “We’ll just ride this out until we see what the end game is.”
Australian stocks have tumbled about 13% from a record high in just over two weeks amid fears the virus will impact supply chains and weigh on demand. More than half of the domestic firms that reported half-year earnings in February missed expectations, according to data compiled by Bloomberg.
The virus, which has around 100,000 confirmed cases and more than 3,000 deaths after emerging from China’s Wuhan province late last year, is weighing on an already soft Australian economy.
Retail sales declined for a second straight month in January, the biggest back-to-back drop since 2010, while futures traders are expecting Australia’s central bank to cut interest rates next month to 0.25%, opening up the prospect of unconventional policy.
Here’s how Davis has structured the Australian stock portfolios:
- The firm has added more REITs, as they’re defensive in times of stress because of the steady income derived from rent collection. They are also less indebted than they were during the global financial crisis
- Davis bought Coles shares at the start of the month amid expectations consumers will keep buying household goods and staples. “People are actually stocking up at the moment because they’re a little bit worried,” he said
- Some retailers with Chinese supply chains are shorted amid a soft economic backdrop and the potential for end of year trading to be affected if the disruptions remain through May. That’s where “most retailers make most of their profit,” Davis said. “If you can’t get your goods in, that’s pretty nasty.”
- With tourism being a “huge industry” in Australia, the fund has maintained a short on Flight Centre and moved to underweight on Qantas as the nation began closing its borders and flights were cut. That adds to the impact from the deadly wildfires in the nation’s summer
- IFM also holds short and underweight positions in Australia’s regional banks as margins get squeezed amid anemic credit growth and expectations of further rate cuts
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