Quality Investing, Coronavirus and Flybe

Published: 09th March 2020 (5 Min Read)

The current environment is a real test of the durability of all business models. The nature of the shock from quarantining is not just found in the breaches in global supply chains, but also in the changing behaviour of consumers. We don’t know how long this sharp downturn will persist, but it is an emphatic interruption to “business as usual”.

It is at times like this when companies which have clear weaknesses can fail, and this is what happened to Flybe. And last year to Thomas Cook. And to countless retailers and contractors.

Policymakers are taking broad steps to mitigate the impact to businesses and households. There is a range of measures which can be taken: Central Banks ensuring that commercial banks have plenty of liquidity (everywhere); deferrals of payments of VAT or National Insurance (UK perhaps); sovereign guarantees of corporate debt (China); helicopter money ($1200 in Hong Kong); ensuring that healthcare systems have all the resources they need at their disposal (everywhere).

These are measures which can have an immediate effect and so, as George Osborne said this morning, “vaccinate the economy”.

Governments everywhere are also looking at how to increase social and investment spending, but these will take time to have an economic or social impact. Wednesday’s Budget should contain both shorter and longer-term measures.

This is the environment when “the strong get stronger”. Strong companies will benefit from the fall-out of this episode. This is one reason why we maintain a focus on so-called “quality” investing.

Quality investments require strong finances, and strong cash flows in particular. They require a competitive advantage in their areas of expertise. This is true of commercial companies, property companies and infrastructure investments.

Sources of income from secure cash flows sourced from well financed property and government-backed social infrastructure or renewable energy projects, or from global leaders across growing business sectors are essential components of portfolios.

We do our best to have limited exposure in portfolios to the corporate victims of disruption or to “price-takers”, those companies which have no or little control over the pricing of the goods they sell, such as commodity companies or banks.

This does not mean that the share prices of the investments we prefer will not fall at a time of generally falling stock prices, but they will invariably survive, and quite likely benefit from, episodes such as this.