One of Australia’s leading global fund managers, Magellan Financial chief executive Hamish Douglass, has warned of a “near total shutdown” of the world’s economy and a “near total collapse in demand” for many companies over the next two to six months as a result of the coronavirus crisis.
The crisis demands a huge amount of government stimulus in response, Mr Douglass says.
In a note to clients issued on Wednesday night, Mr Douglass, who manages more than $100bn in investments largely outside of Australia, warned that governments could be forced to spend as much as 30 per cent of their gross domestic product to “head off the worst-case outcomes” of the crisis, which could include a depression.
Mr Douglass warned that the crisis could result in the collapse of many small businesses and other companies with big debt levels or high fixed costs.
He said the companies that were most vulnerable to the expected downturn included banks, energy companies, airlines, travel-related companies and property trusts.
“The most likely outcome of the efforts to contain this emergency is a near total shutdown of the world’s economy over the next two to six months,” he said. “This is likely to lead to a near total collapse in demand for many (but not all) businesses over this period.”
Mr Douglass warned that the crisis could “prove fatal, particularly for businesses that have high financial leverage or high fixed costs”. He said only governments had the power to step in and head off the worst of the crisis.
“The shape of the economy will depend on the scale, timeliness and effectiveness of actions taken by governments and central banks to help businesses survive and keep people employed over the next two to six months,” he said.
Mr Douglass said the potential outcomes ranged from a V or U-shaped recovery or even a depression. He said Magellan was unable to assess the most likely outcomes as it did not know the size or the effectiveness of the potential fiscal and monetary responses by governments.
He said it would need an unprecedented fiscal stimulus of 20-30 per cent of GDP to “head off the worst outcomes”. For Australia, that would mean an injection of something like $400bn to $600bn.
Mr Douglass predicted that the crisis could hit emerging market countries particularly hard as their governments would not have the fiscal fire power to be able to counter the size of the downturn.
But he said countries like Australia, Canada, China, France, Germany, Japan, the UK and the US were “in a strong position” to respond to the crisis.
He called on politicians and central bankers to act quickly and “with sufficient force” to prevent a “devastating economic collapse”.
“We are assessing their efforts as they announce them,” he said.
Mr Douglass said Magellan had responded to the crisis by increasing the cash levels in its global equity portfolio from 6 per cent to 15 per cent, all of which was held in US dollars.
He said the fund had “meaningful investments” in businesses that could prove resilient in the current environment such as three US utilities, Eversource Energy, Xcel Energy and WEC Energy, as well as US-based telecommunications company Crown Castle International, consumer staples such as Nestle, RB and PepsiCo and Swiss-based pharmaceutical company Novartis International.
He said most of Magellan’s major technology stocks were likely to be “resilient” in the current environment including Microsoft, SAP of Germany and China’s Alibaba and Tencent.
However, he warned that the fund was also exposed to three restaurant companies — McDonald’s, Starbucks and Yum! Brands — that now faced a “challenging demand situation” over the next two to six months “as the world shuts down”.
But he argued that the brands “should recover strongly” and prove to be “defensive” in the face of an economic downturn.
Mr Douglass said he felt that China would be one of the best-placed economies to recover from the situation, which would benefit companies such as Alibaba and Tencent.
“This is a complex, fast-moving and unprecedented situation,” he said. “We will continue to manage the portfolio to protect the capital of investors.”
This article was originally posted on The Australian here.
Magellan is one of our Core Fund Managers.
Licensed by Copyright Agency. You must not copy this work without permission.