The head of Australian equities at Nikko Asset Management, Brad Potter, has commented that the COVID-19 crisis and related mass shutdowns are “placing enormous pressure on the earnings, cash flows and balance sheets” of any number of companies.

It’s a tough situation to navigate, with Mr Potter conceding that “given how fast the situation is changing, including government intervention, we expect our views to also change”.

Despite the challenges, the equities expert has provided some commentary on how the current situation is impacting a number of sectors:

1. Banks

Recent government support packages will allow sometime before bad debts ramp up; however, Mr Potter did concede that SMEs “are simply more vulnerable to the shutdown”.

But with the banks themselves having more than twice as much capital as they had going into the GFC and less exposure to property and more exposure to mortgages, “they should get through without raising more capital”.

2. Retail

According to the expert, non-discretionary retailers – especially those focused on home consumption – should do reasonably well.

“Retailers that sell into cafés and restaurants will be negatively impacted, but few retailers are overly exposed to this sector,” he commented.

From Mr Potter’s perspective, the biggest risk that is facing both retail and the banks is a longer form of shutdown.

3. Gaming

“While gaming is perceived to be relatively defensive and gaming revenue in Australia as a whole was still positive throughout the GFC, the impact from the COVID-19 has negatively impacted the gaming sector substantially – more than the broader market,” Mr Potter has said.

In saying this, those within this sector that have diversified into online channels are seeing some offsetting benefit.

This is due to patrons seeking out alternative forms of entertaining while social distancing.

4. Diversified financial

There’s a “saving grace” Mr Potter has credited to keeping the diversified financial sector buoyant during this challenging period.

“Many of these companies run net cash balances, and so have minimal balance sheet risk.”

Therefore, he highlighted that while there is substantial short-term pain, “once markets return to normal (whenever and whatever that may look like), many of these companies will be in a position to move forward”.

5. Infrastructure

While infrastructure stocks such as toll roads, airports and gas pipelines are generally perceived as defensive and “relatively immune to an economic slowdown”, Mr Potter said COVID-19 is “completely changing the way individuals go about their day-to-day routine”.

“To state the obvious, these are not normal market conditions.”

As a result, the equities expert said many of these companies “may need to turn to equity investors to shore up their balance sheet if the debt markets experience a GFC-like freeze”.

6. Real estate

“We expect retail to perform poorly during this period as landlords will pull out all stops to keep vacancy in their centres down – think rent relief or escalated capital contributions as more tenants turnover,” it was outlined.

Mr Potter highlighted that “assets with a higher discretionary composition will be hit harder by the COVID-19 crisis, with the effect of flowing directly into rental income as well as ancillary income such as car parking and advertising fees”.

In saying this, Mr Potter did suggest industrial should still hold up fine, while the trend towards e-commerce looks likely to continue.

7. General insurance

Mr Potter is expectant of general insurance being “somewhat defensive in this current environment, as it has during past economic downturns”.

“Commercial insurance is not quite as defensive as personal, because businesses can look to reduce premium costs via reducing the scope of their insurance,” he outlined.

He considered that the building materials sector is likely to be significantly impacted by COVID-19.

8. Oil and gas

Facing “unprecedented” pressure from simultaneous events on the supply and the demand side, Mr Potter explained that “the economic slowdown from global governments curtailing activity in an attempt to slow the spread of COVID-19 will see oil use in air and land transport severely curbed, though the quantum of volume loss is difficult to determine, given uncertainty around the duration of the slowdown in activity”.

He has observed that at current oil prices, most major supply participants are losing cash, or are requiring to either draw down on sovereign treasury reserves or put austerity measures in place to curb the fiscal bleeding.

Looking more long-term, the equities expert said Nikko AM continues to believe that the world requires higher oil prices to incentivise replacement supply from higher-cost conventional sources, such as ultra-deep water.

9. Mining

Mr Potter said the COVID-19 crisis is creating “significant but quite diverse issues for the mining sector”.

He noted that base metal prices are suffering on the weakened and uncertain global economic outlook, while bulk commodities, in particular steel-making inputs, iron ore and coking coal, have held up remarkably well.

“Fortunately, most of the sector has relatively low gearing and should be able to weather current events,” he considered.

“Like the oil sector, the sell-off has seen substantial value emerge from the miners. Most current base metal prices are biting deep into cost curves, which should provide price support over the longer term.”

10. Healthcare

“Although healthcare is typically perceived as being a relatively defensive sector, the reality is that times of economic weakness do impact demand for healthcare services,” Mr Potter conceded.

He observed a decline in GP visits, which will flow-on to pathology and radiology volumes and in time, impact sleep testing and elective surgery demand.

Unaffected areas include life-saving medication and ventilation manufacture.

Looking forward, Mr Potter said beyond a period of weaker demand associated with the current shutdown, “the prospects for different participants will vary according to their exposure to [the] broad] economic environment that results and their reliance on government funding”.

“Certainly, government indebtedness will be higher in most, if not all countries, meaning healthcare budgets will be under greater pressure.”