The outbreak of Covid-19 and its ripple effects across the global economy continue to cloud the outlook for long-term investors. It is especially important to assess the investment risks posed by the ongoing impact on various industries’ supply chains.
It is crucial to assess industry and company risk across the whole value chain and watch out for companies exposed to supply-chain risks. Then you will be ready and able to respond efficiently during times of market panic, turning fear into opportunity.
Our emphasis on supply chains has facilitated investment in businesses with sustainable franchises, strong pricing power, low disruption risk, high returns on invested capital (a key gauge of profitability) and strong balance sheets.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
These are companies better able to weather the short-term storm that the coronavirus has generated across both the supply and demand side of global economies and along whole supply chains.
Resilience in Italian luxury retail
We believe that companies with more wholesale exposure will be at higher risk. However, established brands with stronger balance sheets will be in a better position to withstand the inventory dislocation caused by the marked reduction in customers.
The Italian luxury fashion retailer Moncler (Milan: MONC) is a good example of this resilience. Thanks to its limited wholesale exposure and strong inventory control, it stands to benefit from strong pricing power over the long term.
We believe that the structural growth potential of the company and its ability to innovate remain strong despite the global economic damage done by the pandemic.
Medical monitoring devices
We also hold the global medical technology company Masimo (Nasdaq: MASI), which develops and manufactures innovative non-invasive patient-monitoring technologies. Products range from fingertip pulse-measuring devices to wearable thermometers that send data to smartphones.
We view Masimo as an extremely high-quality business stewarded by an experienced management team, and as such we are confident in its ability to navigate turbulent operating environments – witness the group’s recent relative performance this year.
Potential virus-induced supply chain problems for Masimo could come from consolidated manufacturing facilities or single-source component suppliers being temporarily disrupted. However, we continue to expect a very strong performance from the company.
Ferrari roars ahead
Inventories in this sector are generally low, and so there is a higher risk of disruption along the supply chain and onto the car manufacturers. In terms of our portfolio holdings, Ferrari (Milan: RACE) might look the most vulnerable, with its entire manufacturing base in Italy.
The company can shift some of its production base around the different models, notably its limited-edition cars, to ensure that capacity is managed efficiently. This is testimony to the company’s pricing power and unique product offering, which should help it get through the short-term volatility in better shape than the rest of the sector.
-
Why now is the right time to invest in biotechThe biotech sector holds huge potential for investors, with strong growth and attractive valuations. Here's the best way to play it.
-
Zoopla: Busiest home buying May since 2021, but property asking prices slideBuyers return to the market after the end of higher stamp duty thresholds and post-Easter lulls, but average sales are £16,000 below asking price
-
Investment opportunities in the world of Coca-ColaThere is far more to Coca-Cola than just one giant firm. The companies that bottle and distribute the ubiquitous soft drink are promising investments in their own right.
-
Streaming services are the new magic money tree for investors – but for how long?Opinion Streaming services are in full bloom and laden with profits, but beware – winter is coming, warns Matthew Lynn
-
Trainline: a cheap cash machine for investorsOpinion Trainline’s shares have slumped owing to concerns about growth, but the sell-off seems overdone
-
Look to British stocks to lead the charge as the Magnificent Seven falterOpinion Gervais Williams, fund manager, The Diverse Income Trust, picks three British stocks where he'd put his money
-
'Pension funds shouldn't be pushed into private equity sector'Opinion The private-equity party is over, so don't push pension funds into the sector, says Merryn Somerset Webb.
-
Greg Abel: Warren Buffett’s heir takes the throneGreg Abel is considered a safe pair of hands as he takes centre stage at Berkshire Hathaway. But he arrives after one of the hardest acts to follow in investment history, Warren Buffett. Can he thrive?
-
Who will be the next Warren Buffett?Opinion There won’t be another Warren Buffett. Times have changed, and the opportunities are no longer there, says Matthew Lynn.
-
Will Comstock crash – or soar?Opinion The upside for Comstock, a solar panel-recycling and biomass-refining group, dwarfs the downside, says Dominic Frisby.
