What a difference a couple of months makes in markets. By the turn of the new year global growth was starting to improve as the rhetoric around the US/China trade war began to fade, and the economy was starting to benefit from the significant easing of global monetary policy over the prior twelve months. This optimism drove global equity markets to all-time highs which saw ASX industrial company valuations hit levels not seen since the 1930s.
In late February, we witnessed what happens to markets when uncertainty (driven by concerns surrounding the coronavirus, or COVID-19) meets markets with full valuations. While the worst of the outbreak appears to have passed in China, in the short term we expect markets remain hotly focussed on the infection data in other countries and the potential impact supply chain disruptions may have on global economies.
Thankfully, February's reporting season was a timely event to bring some much-needed focus back to underlying company fundamentals. While feedback regarding COVID-19 overshadowed much of managements' outlook commentary, it was starting to become apparent who were better placed to ride out the short-term headwind.
Heading into the month we expected a volatile reporting season given a number of companies announced downgrades to earnings guidance ahead of scheduled profit announcements. Pleasingly, we didn't own any of these companies. At the start of the month, ASX-listed industrial stocks (ex-banks, resources and property) were expected to only see flat earnings per share (EPS) growth for FY20. This was in stark contrast to expectations only a year ago which had forecast 10% EPS growth. Yet by the end of the February, expectations were downgraded even further to -3%. However, behind this figure is a dispersion between domestically-focussed businesses (where EPS growth is forecast at -8%) and those focussed offshore (with EPS growth forecasts of +5%). Our portfolios focus heavily on the latter, who continue to benefit from the weakening Australian dollar and paying progressively growing dividends.
As is typical of reporting season we experienced the odd outlier, both positive and negative, which coincidentally occurred late in the month. Plumbing products manufacturer Reliance (our only disappointment for the month) delivered a weaker-than-expected result on the back of: i) cycling an extraordinarily strong result last year; ii) the slower take-up of its new products, and; iii) uncertainty regarding parts of its supply chain due to COVID-19. We retain our holdings and believe the business still has the ability to generate earnings growth. However, from here, we're stringently focussed on management's ability to deliver. Pleasingly, Australia's largest funeral provider Invocare announced an(other) exceptional result. While some in the market were doubtful, the result clearly illustrated accelerating momentum from its ongoing strategy of modernising and refreshing its funeral facilities.
With current information at hand we took the opportunity to actively manage portfolios: trimming a number of positions and topping-up others where we saw more attractive opportunities. Prior to results season, we were happy taking profits in private hospital operator Ramsay Healthcare and also took similar opportunities to reduce exposure across Commonwealth Bank and residential housing developer Stockland after their results. Following solid results from consumer goods packager Amcor and resource project consultant Worley, we felt valuations were attractive and added to our existing holdings.
Looking ahead, we believe all asset classes are now pricing in a degree of short-term weakness in growth however, we continue to feel the impact to supply chains will be largely temporary. In the meantime we retain our steely focus on the preservation of capital which sees us retaining a portfolio of high quality companies. We will look to deploy surplus capital only in where we believe valuations offer us a sufficient margin of safety. Otherwise, we remain comfortable being more defensively positioned.