Nestor Australia fell by about 38.5% in the first quarter of 2020 and thus by about 5% more than the index. The weak Australian dollar, down 11.5% since the beginning of the year, contributed significantly to this; but of course the small and mid-cap segment, which is difficult in this environment, also played a role. The 20-year average for the Australian dollar against the euro is 1.57 (today 1.79 A$/Eur). For the medium term, we consider a valuation around 1.60-1.65 A$/Eur to be appropriate, and we expect an upward trend for the currency – against both the US$ and the euro.
Surprisingly, despite strong gold prices, the gold mines and developers segment could only make a small contribution to the balance. The global MVIS Junior Gold Mines Index, which includes the major Australian gold producers, could not escape the general bear market and fell by 32% during the reporting period. Gold mines are heavily undervalued, and gold prices range from 1200-1250 US$/ounce. The only reason for this may be the fear that mines will be closed worldwide. This will certainly happen in Australia in some individual cases – but mining has been declared an absolutely vital sector in Australia, with a general attempt to keep the sector going as long as possible. We therefore expect closures only in special cases, and even then only temporarily. In individual countries such as South Africa, Chile or Peru – and to some extent also in Canada – much stronger action has been taken in this regard, with some complete closures.
However, overall the spread of coronavirus in Australia is limited. As of today, 3 April 2020, there are slightly more than 5,000 confirmed coronavirus infections in Australia and these have also only doubled over 11 days – so we have significantly lower growth rates there than in Europe, and especially the US (doubling in 5 days).
The Australian market as a whole, in local currency terms, has behaved in a broadly similar manner to the average for global stock exchanges, with a decline of about 25% (DAX slightly more, S&P slightly less).
The measures taken in Australia to prevent the mass spread of the virus are comparable with the precautions taken here in Germany, such as school holidays, a ban on gatherings, restaurant closures etc., etc.. Australia is probably benefiting strongly from the entry ban, and presumably also from its insularity.
Worldwide, commodity prices – particularly minerals, metals and energy – have come under strong pressure. In the oil sector, we also have the well-known specific situation of a supply-related price decline over the past
4-5 weeks. Here, the fund used extreme prices to build up a position in Beach Energy. Through Strike Energy, the fund already had a significant position in the energy sector, as well as through the renewable energy producer Genex Power. But we would like to point out here that many mines in large producing countries such as Chile are also only allowed to operate to a very limited extent, if at all.
As is to be expected in the currently extremely volatile market environment, the fund was very active during the quarter. Positions in Liontown Resources and Mineral Resources (lithium is currently not exactly the commodity of the hour, but will of course be closely monitored), Mesoblast (biotech, an opportunistically taken trading position, sold at a profit), Opthea (biotech, which was painful for us: one of the biggest winners in the history of the fund) and Zenith Energy (takeover offer) were sold. Positions in Middle Island (positive cash flow in the distant future), Origin (valuation became very ambitious), West African Resources (share price still very reasonable, but risk management limits positions in the fund to basically 5%) and Osino Resources (strong price rise) were reduced.
On the other hand, a position was taken in Catapult Group (a global market leader in sport analytics). Existing engagements in Fleetwood Corp (an operator of mining camps, construction of modular buildings), IVE Group (printing and marketing – shares were under heavy pressure due to dependence on retail trade), Perenti Global (one of the largest mining services companies, which saw an unjustifiably sharp fall) and Scidev (development of chemical processes for water conservation, especially in mining and oil companies) were expanded.
The fund's best performer over the quarter was Marley Spoon – a company originally founded in Berlin and listed in Australia (its strongest market). Like Hellofresh, Marley Spoon supplies pre-packed meal kits to private households. Already at the break-even point, revenue and EBITDA growth will increase massively due to the coronavirus crisis.
All in all, Australia seems to be coming off rather lightly from coronavirus – in terms of the scale of the crisis. At least that is what the current figures and the developments of the last 1-2 weeks indicate. The mining industry is strongly supported by regulators, and the Australian government and central bank have taken early and massive countermeasures. There is no doubt, however, that Australia will enter a deep recession in the current quarter. However, we believe that globally – and in the short term especially in China – a massive increase in demand can be expected again. This will happen with a time lag: whereas China is already picking up strongly month by month, in Europe and Australia it is more likely to happen in May (then compared with a weak April) and in the US even later. But the level of the last quarter of 2019 will presumably only be reached again towards the middle of 2021.
The investment-technical environment will, however, perform similarly to the last 12 months, and potentially even better. The unprecedented liquidity injections by virtually all central banks, and the massive cash injections by governments around the world, are creating an environment of continued low interest rates, and incredible amounts of money looking to be invested. We therefore expect an extremely positive environment for equities in general, and commodities and gold in particular, during the second half of 2020, if not earlier.
We see the risks for the stock market development mainly in legislative impulses (temporary abolition of dividends??), or in a major confidence crisis, assuming budget deficits that can no longer be financed.
For the medium term, we consider many of the fund's equity investments to be massively undervalued and we expect significantly above-average performance for the next 12-18 months, from today's level – although, of course, there are risks in the short term. Without predicting a similar performance, we remember the years 2009 and 2010 after the financial crisis.
Wilhelm Schöder, Schröder Equities GmbH