Investors should not overestimate the impact of COVID-19 financial stimulus on markets and keep their focus on stocks with valuations based on long-term cash flows, according to an Australian shares investment manager.
DNR Capital Australian Emerging Companies Fund portfolio manager Sam Twidale noted a long-term investing view favouring companies with resilient balance sheets, disciplined management and strong industry positions could prove more advantageous for investors than over-capitalising on the short-term benefits experienced by certain companies during the pandemic.
In particular, Twidale pointed out the beneficial impact of COVID-19 financial stimulus on consumer companies should not distract investors from the companies adversely impacted in the short term but likely to recover well after the pandemic.
“With increasing concerns around the spread of COVID-19, companies most severely impacted in the short term have suffered significant share price falls given depressed valuations. These include companies with leading industry positions and strong balance sheets, which we expect to take a greater share of the market during the eventual recovery,” he said.
“We need to look beyond the near-term earnings downgrades arising from COVID-19 in favour of valuations based on long-term cash flows. Although some of these companies suffer from a lack of visibility in the short term, it is this uncertainty that presents attractive opportunities for long-term investors.”
He encouraged investors to focus on valuations based on long-term cash flows rather than earnings expected over the next six to 12 months, as the market was likely to overreact to short-term predictions.
“Given the temporary nature of many aspects of the pandemic, short-term earnings are not always a true reflection of the long-term earnings power of a business,” he added.
In June, Schroders Australian fixed income and multi-asset head Simon Doyle said investors could not afford to be complacent despite markets showing signs of recovery.