The outbreak of the coronavirus has rapidly turned the world upside down. The pandemic has taken hold of our daily lives and we are constantly confronted with its repercussions. But for calm investors, it is already worthwhile taking a look at the post-pandemic investment world!
Central banks and governments are responding to the unprecedented crisis in an unconventional, effective and swift manner in order to dampen the short-term negative economic effects. It is already apparent that governments are fundamentally redefining their roles - particularly in Europe. Here, the public's call for strong governments that protect private companies, in particular, from the economic ramifications is growing louder. The key question of what sustainable and long-term effects these interventions will have on the economy has not yet been answered. Doubts about governments’ abilities to be good entrepreneurs in the long term are not unfounded. One thing is certain, however, that this decade will be characterised by strong governmental leadership.
One important finding to emerge from the pandemic will be the new dimension of government debt around the world. The International Monetary Fund estimates that in industrialised nations the debt ratio in relation to gross domestic product will rise from 105 percent to 122 percent. In the US, debt will rise by almost 20 percent to 131 percent, in Germany from 60 percent to around 80 percent, and in Switzerland from 39 percent to 46 percent. High debt levels, coupled with low structural growth and demographic change, will entrench the low interest rate environment for decades to come, especially in the industrialised nations. These changes imply a new way of thinking in traditional investment paradigms in order to preserve one's assets over the long term or to be able to increase them in real terms. Dividend-oriented companies are becoming increasingly important in asset allocation, but, in the current environment, they are not immune to the effects of government intervention or the pandemic itself. In order to avoid a significant loss of dividends, as is currently the case with dividend ETFs, company-specific aspects are becoming the focus of the selection process. Our dividend concept provides for a detailed company analysis, which includes their assets, earnings, and financial position. This analysis process identifies companies with robust balance sheets, which, in the current liquidity squeeze brought about by loss of demand and production, are not dependent on government intervention. Our global dividend fund currently contains more than a dozen companies with a net cash position. In addition, a balanced approach is used, combining defensive companies with low volatility cash flow with small and mid-cap companies, particularly family-owned ones. Within the MainFirst Global Dividend Stars, we prefer companies with attractive business models and competitive advantages, which are reflected in market positioning and operating margin levels. Our fund includes companies such as the industrial gas producer Linde, the Swiss pharmaceutical group Roche or hidden champions such as the US industrial conglomerate Illinois Tool Works or the family-run Italian company Carel Industries.
We have actively used the volatility on the markets to invest in strong business models with significant valuation discounts. One opportunity that we have taken advantage of is Nike. Nike is one of the leading global sports goods manufacturers with a strong corporate culture and above-average operating margins. The company has lost a significant share of retail sales as a result of the global "lockdown", but we believe it is unrealistic to expect there to be no demand for sporting goods in the future. In addition, Nike's management has already taken effective measures to prevent significant damages in China, despite the "lockdown", and these experiences are being implemented throughout the Group.
Prudent and long-term investors should focus on the period after the pandemic and actively use the current valuation discounts to invest in attractive business models with good market positioning, strong management teams, and good dividend prospects.
Authors: Thomas Meier & Christos Sitounis, Portfolio Managers of the MainFirst Global Dividend Stars and MainFirst Euro Value Stars