Dear Clients & Friends:
Earlier this month we shared a letter that provided you with an update on Axiom's COVID-19 response in terms of Axiom's business, the markets, and the portfolios in general. Our letters and future updates can be found on our website, www.axiom-investors.com.
Under Connecticut Governor Lamont's directive, Axiom Investors is working remotely. Our daily operations, both investment and non-investment, are functioning smoothly and we have not experienced any issues conducting normal business. We are communicating frequently and effectively using Microsoft Teams as our primary video chat and collaboration platform to ensure continued productivity and maintain strong team morale. Additionally, the investment team continues their daily use of Axware, Axiom's proprietary database for ranking operational data of our portfolio holdings, as another primary collaboration tool.
On the positive side, new case numbers appear, at least temporarily, to have dramatically slowed for China, South Korea, and Japan. Singapore, Japan, and most recently several provinces in China are planning to reopen schools with some additional health oversight protocols. The current USA shelter at home policies and social behavioral changes should mitigate case numbers in the following weeks and allow for some curve flattening to help create time for the medical system and hospitals to prepare. There has also been some hopeful data on the use of several drugs: Hydroxychloroquine potentially in combination with Azithromycin (both widely available and inexpensive) and Remdesivir (limited availability and expensive).
On the negative side, we continue to watch the growth of confirmed cases globally as the number of worldwide is about to pass 400K. It took over three months to reach the first 100K confirmed cases and only 12 days to reach the next 100K as the social distancing policies take time to have effect, although there have now been a several successful precedents. The situation in Italy remains poor with its death toll surpassing that in China and a fatality rate around 8% (much older population than China and the US and a higher proportion of smokers). However, there are now signs of new cases stabilizing in response to the strict social distancing rules. While testing capacity in USA is ramping rapidly, which is key for the containment effort, it will cause the number of reported cases to continue to rise over the coming weeks, which could be a challenge for the market. Protective medical equipment and respirators remain in short supply and governments are struggling globally to increase immediate availability.
Global Markets Update
The number of COVID-19 cases globally continued to rise and volatility persisted through the week, with stocks declining sharply. Central banks and governments around the world announced a combination of monetary and fiscal measures to support global economies with ~50 policy moves in the past week alone. European countries announced a combined $2+ trillion in new fiscal spending and US policy makers are currently negotiating a potential $2+ trillion stimulus plan. The Federal Reserve cut rates by a full 1% to 0 to 0.25% and committed to using its "full range of tools" to support the US economy and key fixed income markets. We have begun to see some signs of stabilization in the weekly and daily data points in China and Korea, including, but not limited to, road traffic in China, domestic travel in China, and some production resumption.
Portfolios & Liquidity
We have not made dramatic changes to our positioning and we continue to be invested in high-quality growth stocks with strong balance sheets that we believe will rebound sharply when the current dislocation subsides. Additionally, turnover is low and the portfolio remains liquid. Our continued avoidance/minimization of banks, energy and industrial materials has been positive. The investment team has spent time reviewing and stress testing the balance sheets and cash flows of our portfolio companies including looking at both debt maturities and interest coverage. We continue to believe that our companies are well positioned to weather the current environment and do not see strong evidence that the medium- and longer-term earnings and cash generation potential of our portfolio has been impaired. We will continue to provide additional information as it becomes available and we thank you for your continued support. As always, if there is any additional information that would be helpful, please don't hesitate to reach out to a member of Axiom's client service team below.
Kurt Polk, CFA
Senior Vice President/Client Service and Marketing