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.
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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.
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