March 16, 2020 BARRON’S 21
pany has moved up the value chain to
sell a whole solution, driving faster
revenue growth, profit margins, and
return on capital. West has no debt.
There might be attractive acquisition
opportunities for it, as well.—L.R.R.
SONAL DESAI
Barron’s: How does the economy
look to you?
Sonal Desai:For the full year, U.S. real
GDP could be 2% to 2.25% (versus
2.5% to 2.75% estimated in January).
Regarding the virus, people tend to be
healthier [here] than in China, so it’s a
better starting point. [We have a] youn-
ger population, relative to Italy. And,
the Federal Reserve has cut rates and is
likely to cut again. If I’m correct, the
economy is set up for a recovery, and
the global economy is slowly coming
back. That’s why we don’t see a global
meltdown similar to the financial cri-
sis. This might be a different kind of
panic that has a lot to do with starting
[equity] valuations.
Where is the U.S. dollar headed?
The euro zone is likely to be weaker in
recovering than the U.S. I expect the
European Central Bank to be accom-
modative for longer. I prefer the dollar
to the euro, but I like the Japanese yen
against the dollar. The yen makes a
good hedge. In periods of risk aversion,
Japanese investors bring money home,
causing the yen to appreciate.
What about the bond market?
I expect Treasuries to be well-sup-
ported until we get greater clarity on
the U.S. fiscal policy response—and
some visibility on how Covid-19 evolves
in the U.S. Corporate bonds will re-
main stressed. We look for companies
that have good balance sheets and li-
quidity to withstand this uncertainty.
I’m not buying right now, but look-
ing carefully. My high-yield debt team
was concerned coming into the year
about how much spreads in BB-rated
credits had contracted. Now, as they
are beginning to blow out, we may find
opportunities. We are looking for seg-
ments of the market that should be
relatively immune to the current envi-
ronment—for example, pay TV.—R.K.
JAMES ANDERSON
Barron’s: Is this selloff overdone?
James Anderson:Despite the human
damage [from the virus], it is hard to
understand among the companies we
own why the present value of future
cash flows has collapsed as much as it
flagging for a while. A setback like this
reveals the fragility of the corporate
structure—and it is worldwide.
Do you see a continued flight to
bonds?
It isn’t surprising to see investors rotate
out of risk assets into safe ones, with
U.S. Treasuries as the key beneficiary.
It feels like a crowded trade. Any re-
spite in the health crisis, either
through a cure for the virus, a vaccine,
or containment of new cases, could
cause Treasuries to sell off, as investors
reallocate to riskier assets.
What should investors do?
I am finding buying opportunities in
the consumer-discretionary sector,
while consumer staples feel over-
valued. The No. 1 priority is to review
your portfolio and see which compa-
nies are most exposed: those with high
fixed costs and volatile revenue
streams. Airlines come to mind. Inves-
tors’ first concern tends to be earnings
risk. At times like this, they should first
think about balance-sheet risk. Earn-
ings will be hit because there will be a
global economic slowdown, but compa-
nies with strong balance sheets, prefer-
ably net cash, and resilient business
models could see that demand for their
products and services is secure, even if
it is delayed.
The other big risk is illiquidity. In
Europe, a lot of exchange-traded funds
are trading at discounts to net asset
value, which has fallen. This suggests
people think the underlying assets
can’t be liquidated. It’s particularly true
“I am looking at equipment
rental companies.”
Mario Gabelli
Chairman and CEO
Gamco Investors
Rye, N.Y.in the bond market, but also the equity
market. In addition, watch the high-
yield market, a leading indicator for
equities that tends to be a good barom-
eter of stress in the system.—R.K.
HENRY ELLENBOGEN
Barron’s:Havewehitbottomyet?
Henry Ellenbogen:If anyone tells you
they know where the market will bot-
tom, stop listening. The bull market
was approaching its 11th anniversary.
Valuations were extended. We knew
we were going to have a down market,
but not what would cause it. Now we
know it was caused by uncertainty
about three factors: the duration of the
virus, its near- and longer-term impact
on the economy, and a divided political
environment in an election year. The
market is wrestling with the first two;
there is a wide range of possible out-
comes. With the election, at least, there
is time certainty.
The market is starting to get attrac-
tive. I’m spending a lot of time thinking
about what companies we want to own
on the other side of this. Which will be
the leaders? Currently, all stocks are
being treated similarly. But all compa-
nies aren’t going to come out the same
way. We have a shopping list, and we
are buying.
What have you snagged?
Quaker Chemical[KWR] is a cyclical
company with a good balance sheet. It
entered the downturn strong and will
exit stronger, but the range of earnings
in the next two years is uncertain.
Quaker sells chemicals and lubricants
to global industries. It has service pro-
fessionals on-site at its largest custom-
ers, helping to ensure they run effi-
ciently. The company has a high-90%
customer retention rate.
Quaker recently merged with
Houghton International, creating the
market leader. Yet it has only a 15%
market share. The deal synergies are
significant. Quaker has created a global
operating platform to do acquisitions.
The company is tied to global GDP and
tends to outpace it. It generates good
cash flow, and will benefit significantly
from lower oil prices, which will some-
what offset the decline in global GDP.
We also boughtWest Pharmaceu-
tical Services[WST]. It is a more sta-
ble business with a strong balance
sheet that has good earnings visibility
and will exit the downturn stronger.
West makes containers for drugs, in
particular biologics, contained in a
liquid. It has a more-than-70% market
share in stoppers for liquid drug con-
tainers. The cost of what West does is
less than 1% of the product’s price. It is
the global market leader and continues
to gain share in biologics, a segment
growing faster than the drug industry.
The traditional business was around
the stoppers, but increasingly the com-
“This crisis will
reinforce the
power of Tesla’s
position.”
James Anderson
Partner, co-manager,
Baillie Gifford Long Term Global Growth fund
Baillie Gifford
Edinburgh“The energy majors...
will be fine with oil at
$40 a barrel.”
Abby Joseph Cohen
Advisory director and senior investment strategist
Goldman Sachs
New York