France Italy and Spain are all seeing the trend of deaths slowing down - a “Light at the End of the Tunnel” – some countries are talking about lockdown ending in less than a month at the end of April. The horrible headlines continue but we are getting numb to them because we all know the stock market is going to anticipate the top (bottom) of the virus spread and regain some confidence well in advance of the actual case number top. There does appear to be an end in sight at this point. There is another good article from Christopher Joye on the latest data analytics here.

Australia is outperforming the rest of the world with a flattening case curve well in advance of the rest of the world’s experience and that is apparent in Morrison’s approval rating – it is the highest for any PM in a decade over his handling of the pandemic. If international investors were worried about which countries to underweight, Australia is not one. Plus, if the the virus is contained sooner rather than later, and economic growth expectations improve, the A$ will rise giving international investors in our market "double bubble" - the benefit of rising stocks and a rising currency.

STRATEGY TODAY

Staying fully invested.

• Our main concern is another leg down.
• With the current trajectory of cases another leg down looks unlikely.
• We have discussed the fact that we have never seen this type of market correction. Very fast. Was it ETF selling causing ETF selling? If it was it can reverse as well.
• Not having seen this sort of ’speed correction’ we are in unchartered waters. We may be re-writing the typical technical pattern in a correction. In which case this may not be a dead cat bounce. As one article says – there is no play book for this correction. Anything can happen.
• We have discussed when we would sell again. Our conclusion is that unless we anticipate another significant downleg we will remain fully invested. We are not trying to finesse little turns, we are trying to catch the big pivot points. So far so good.
• With no play book to go on there is just a chance that this proves to be one of the market’s great long term buying opportunities caused by a short term disaster.
• The game from here is to avoid a secondary market collapse, not a secondary market malaise. Secondary events are coming (companies in toruble, credit issues maybe, awful economic numbers) but we need not live in fear if the virus has been contained.
• As we settle down stock picking becomes more important and our focus.
• Stock selection initially is about avoiding negative shocks - potential company collapses – and catching the bargains as distressed companies recapitalise.
• Our Oil sector trade is all over the place but we are well up (over 20%) on some of them and will not be selling. The solution will come one way or another on one timeframe or another.

See below for an attempt to identify companies at risk.

HIGH DEBT TO MARKET CAP RATIOS

There is an AFR article today with one fund manager making the now obvious comment that there is “going to be an avalanche of equity ratings. There are balance sheets that just can’t support a hard stop”. Some companies have seen revenue fall to zero in a ‘revenue stop’, some retailers for instance. “There are no hard and fast rules here because some industries can sustain heavy debt loads – infrastructure is a good example. But a useful marker is that anything above a one-to-one ratio – that is, more debt than the company is worth on the market – should warrant very close examination”. You will find new columns in the MARCUS TODAY ALL ORDS SPREADSHEET today that not only include the new additions of debt, cash, net debt and debt to equity but now includes the debt to market cap ratio as well. This allows to isolate the companies with over 1.0x debt to market cap. Here are all the companies in the top 200 by market cap with high debt to market cap ratios (right hand column).

One Caveat - This is only one rather blunt ratio – it is a filter no more. When it comes to experience on the ground each company will have its own issues and it will come down to cash flow and revenue disruption and this ratio takes no account of that:

As you can see from the list – Banks, Utilities, REITS, Infrastructure stocks dominate the list. This is to be expected and assuming we don’t end up with a financial crisis can probably be ignored. Stocks that are not naturally highly geared but are on this list that maybe do offer cause for concern include QAN, OSH (capital raising today), BLD, DOW, NUF, LNK, ZEL, IPL, TAH, VOC, SVW.

Worst of the rest – here is a list of the highest debt to market cap ratios in the ‘bottom 300’ stocks in the All Ords. If one of your stocks is in here you might want to have a closer look at the company’s recent comments.

On the flip side here are the stocks in the top 200 that have the lowest debt to market cap ratios – again – this is a blunt ratio – low debt to market cap is not gauge of cash flow issues on the back of revenue disruption:

THE OPPORTUNITIES

Henry has written about recapitalisation trades numerous times, this is where the money was made in the GFC, buying the equity issues of distressed companies. FLT today. OSH today. WEB, COH, NXT, - also AIA, SXL, REH, PAR today.

One bargain stock mentioned in an article this morning was SYD which has a 99-year lease over a monopoly asset in Australia’s biggest city but has seen $9 billion knocked off its market capitalisation which is 15 times annual cash flow. We hold it.