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Video: Assessing the impact of coronavirus on European shares

Crux fund manager Richard Pease tells Emma Wall how he has been investing through the market volatility.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • European equities have felt the impact of the coronavirus uncertainty
  • Some sectors have seen accelerated decline and may never fully recover
  • On a long-term view however, there are reasons to be optimistic


Emma: Hello, I'm Emma Wall and I'm joined today by Crux's Richard Pease to talk about the impact of coronavirus on European equities. Hi Richard.

Richard: Hello.

Emma: So Europe has been the epicentre of the coronavirus crisis, almost in an unforeseen manner centring particularly on a number of countries. How has what's been going on with the virus impacted European equities?

Richard: Initially very, very severely and that was pretty much a global experience obviously. We certainly thought it was going to be more of a SARS-type thing rather than a global thing and so I think we were all taken by surprise. I think the markets being able to obviously revaluate situations and I think as long as companies are being well funded and can kind of hold their breath through the crisis I think the market then was able to look ahead. Certainly you've seen the market recovering quite strongly in the last six weeks and being a bit more measured.

Emma: For you as an investor, did you see this as an opportunity to add or indeed reshape the portfolio, what did it mean from an investment point of view?

Richard: I think when you get extremes of sentiment and volatility, if you can keep your nerve and actually behave rationally the market will reward you at some stage - hopefully in the reasonably near future.

I think what we try to do is work out what we really believed in, what we really felt was very good value and favoured those stocks.

I think if you had some doubts in a way, it was no doubt and you probably took the opportunity to actually swap that for something where you had higher conviction. So we definitely did some of that. I think the temptation is always to go super safe and just have something very respectable and uncontroversial. I think that tends to be a mistake because if it hasn't fallen it won't bounce and we felt the markets were oversold.

Emma: How do you sort out what has been beaten up by sentiment but the fundamentals continue to be competitive on a medium/long-term basis versus stocks where there may well be a longer term structural change to that sector?

I'm thinking in particular of things such as tourism, travel, airlines where there is some question around their recovery.

Richard: I think that's a fair question.

We didn't happen to have any airlines but we did actually buy into Airbus after it had fallen but to be fair not right at the bottom. And I think again you have to have a very good reason. Our reasons were that it was from a balance sheet point of view very robust, indeed with a lot of industrial cash unlike its main competitor Boeing that's leveraged and had issues with Boeing Max.

We actually believe that people will still fly. I think you could argue that may take two or three years to get back to where we were last year – I think that's probably fair. I mean business travels is 12% of travel and that may be more selective but I think to take a bet against people wanting to have a holiday or see their family I think is a bad bet longer term.

With Airbus you have got a global champion and if you kind of believe in the story and it had something like 10 or 11 billion in industrial cash with a lot of scope for margin improvement. If we get back to what we've got to last year you can see how it's on a very single figure multiple with a capital-light business model and a much more shareholder-friendly approach.

So those sorts of stories I think have been opportunities but you have to have the patience and the balance sheet, obviously.

Emma: And what about certain sectors where there isn't that ray of light at the end of the tunnel?

We were talking before we began recording about trends that were already in the market but this volatility has simply accelerated - like e-commerce for example.

Richard: Yes I think that's a good point to make I think bricks and mortar retail we all kind of know was having a very tough time, post this crisis I'm afraid if it's possible it's even worse, it's accelerating it's demise. But we haven't obviously had exposure to bricks and mortar retail.

I think people are perhaps trying to re-evaluate their approach to having an office and that's certainly impacted some of the property company valuations. Again, I think we would differentiate between offices and retail if you've got a lot of retail as a property company I think it's much tougher. I think again it's a personal view but I think with offices yes, I think it will put some pressure on demand and obviously on rents and valuations but I didn't believe in the end of the office actually.

And I think certainly if you look at some of the discounts these property companies are now on - we don't have much exposure - but I think there's a perfectly good case as an investment.

Emma: Now we're all very familiar with the UK government's approach to the coronavirus because we're living it, we're still living in lockdown; what's happening in Europe? And how is that impacting the underlying stocks?

Richard: Well I think just on the ground as it were Europe is opening up. It's a little bit ahead of us - it was a bit ahead of us into the crisis and now coming out of the crisis. Certainly Sweden for example had a very different approach, as you probably appreciate, which was never to really lock down.

And we watched this space and I think from a sort of stock market point of view we've seen some quite strong recoveries as we speak now. Stocks which have in some cases halved have recovered quite sharply but they're good long-term businesses. So I think people, it's a fool's game to try and guess exactly what's going happen next. But I think if you can focus on the quality of a business and its dominance say in the market. And make an assumption that we will win against COVID 19, which I am an optimist I do believe we will, it would be really odd to knock a stock which wasn't particularly expensive by 50% if it's a sort of two-year problem because we try and value things on a 15-year basis, not on a two-year basis.

So you can sort of see once the market gets rational that stock prices do recover and I think the other positive or just a fact of life is that when we're in a difficult time - like we obviously are - interest rates are not going to go up. So the person with cash and if you do nothing you get nothing - or less than nothing if you're in France or northern Europe.

Emma: How much of what happens globally is impacting what's in the portfolio? Because I know that you look for leaders within their field which are often international in their outlook, client based revenues, lots of cash, so presumably even if Europe begins its recovery, opens up its doors - you're dependent a little bit on the rest of the world getting up to that level as well?

Richard: That's true, and I think at the moment we obviously have the added complication of China and the US and all the trade wars that we've been talking about before but in a way have been souped up a bit because of what's happened. And that's certainly, being cynical about it, a problem until the November election in the US where I think perhaps hopefully it'll be less emotional in terms of how it’s put. So we do worry about those sorts of macro factors but I think you know at the end of the day it's always about picking a company which can handle trouble and in some cases benefit from the volatility. Because I think it's easier - one of our basic approaches is to buy into businesses which can actually augment their growth by inexpensive bolt ons. And it's probably easier to do it in a difficult time than when everyone wants it and private equity's too much money to spend and so I think again if you can keep calm in these situations you can actually plant the seeds for some very good long-term opportunities.

Emma: Richard, thank you very much.

Richard: Thank you.

This video and any comment on individual companies is not personal advice or a recommendation to invest. If you are unsure about the suitability of an investment please seek advice. Investments and their income can fall as well as rise in value and you could get back less than you invest. Please read the key investor information before investing for more details on the risk and charges.

The views in this video are those of Richard Pease and may not be shared by Hargreaves Lansdown.

Views correct as at 02 June 2020.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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