Continuous Disclosure: How to coronavirus proof your portfolio and why volatility is here to stay

Fisher & Paykel Healthcare should benefit from the coronavirus outbreak. Photo / File

Global stock markets are crashing with the double whammy of coronavirus spreading further and the oil shocks sending US share markets into bear market territory.

First the positive news: it's less bad for New Zealand investors who stay close to home.

Sam Trethewey, portfolio manager at Milford Asset Management, said New Zealand and the NZX50 by its nature was much more defensive relative to the US.

"We don't have any material exposure to financials, energy and oil stocks. In New Zealand a large chunk are high dividend paying companies which have so far held up well."

The power companies, real estate sectors and utility stocks are expected to be largely unaffected by the coronavirus, although the uncertainty over the NZ Aluminium Smelter decision is still weighing on the power companies.

Then there are those that are likely to benefit from the virus.

Mark Brown at Devon Funds Management, said there were two stocks which should benefit from the virus both in the healthcare space.

"Fisher & Paykel Healthcare with its strong position in hospital respiratory products and a significant portion of overall revenue coming from consumable products like masks and tubing should see sales exceed expectations.

"The other company is EBOS which should benefit through its pharmacy chain in Australia which clearly has seen serious demand across a wide range of products."

The bull market appears over

THE RAVAGED
Tourism stocks Air New Zealand, Auckland Airport and Tourism Holdings have unsurprisingly gone through a tough couple of weeks.

Air New Zealand's share price share price has literally taken a nose-dive since mid-January.

But Brown said outside of those obvious stocks he would suggest being cautious with investments in the retirement sector given its customers are the most at risk to the virus.

"Unfortunately the mortality rates are highest in the elderly segment of the population and a virus outbreak within a local retirement village could have massive repercussions."

Shane Solly, portfolio manager at Harbour Asset Management said while some exporters of goods and services may come under earnings pressure in the near term as activity slows, companies that benefit from positive structural trends should recover.

"The real risk lies with cyclical companies that need strong domestic or global economic earnings to support earnings.

"Stocks that may really come under pressure are those relatively with high levels of debt – if their cashflows are compromised due to a cyclical slowdown they could be forced to raise emergency capital."

VOLATILE YEAR
But get used to seeing the markets bouncing around.

Solly says markets will remain volatile in the short term while COVID-19 spreads.

"For volatility to drop we need to see infection rates peak (this may have occurred in China and China is getting back to work, but has yet to happen elsewhere), a global policy response ( this is underway with monetary and fiscal policy changes) and for valuations to get to attractive yields (getting there with equity market dividend yields getting back to attractive absolute levels, and very attractive levels relative to )."

Solly said for patient investors the market pullback was offering some investment opportunities but investors needed to be increasingly selective.

"... with economic activity likely to remain imbalanced investing in quality businesses with good governance and strong balance sheets may provide the best defence."

DEALS ALL GO
So far the market volatility doesn't seem to be seeing deals fall over.

There has been no indication that the Metlifecare takeover won't proceed.

Continuous Disclosure understands there the scheme agreement does not have any market fall termination event which means regardless of how much the market drops that won't stop the deal going ahead.

The AFR also reported this week that New Zealand buy now pay later company Laybuy was still on a listing trajectory and was pitching its plans to fund managers in Australia this week.

The company is said to be planning to raise around A$40m for an IPO on the ASX in May that would put the company's market capitalisation at A$200m.

Z Energy will benefit from lower oil prices but will also be hit by lower jet fuel demand caused by the coronavirus. Photo / Warren Buckland

DIVIDEND TRIM FOR Z?
The collapse in the oil price will be a boon for Z Energy but fall-out from the coronavirus is likely to mean lower jet fuel demand drags on its earning next year, says Forsyth Barr analyst Andrew Harvey-Green.

Harvey-Green upgraded the earnings before interest, tax, depreciation, amortisation and fair value adjustments (EBITDAF) of Z by $18 million this week to $376m after the price war between Saudi Arabia and Russia broke out causing crude oil prices to plunge.

That forecast is now at the higher end of Z's 2020 financial year forecast range of $350m to $386m but Harvey-Green warned that oil prices were likely to correct in 2021 which will weigh on Z's 2021 financials.

He also warned that lower demand for jet fuel from airlines because of COVID-19 and lower refining margins would weigh on the stock's earnings and share price in 2021/22 and likely lead to a small dividend cut.

"We have cut our FY21 and FY22 dividend-2cps [cents per share] to 38cps." Harvey-Green sliced 22cps off his target price lowering it to $4.46 but still has an outperform rating on the stock with potential for its gain from cost saving measure, and be a takeover target is a sector which is going through a lot of change in Australia.