Global Pandemic: What to Buy in a Sinking Market

I recently purchased an SUV. I was enjoying the car — a Mercedes. Especially on motorways, where the size and presence gives you a sense of security. Then disaster struck…

I’d barely owned the vehicle a week. And parked across the road from a local restaurant on a windy day. A gust of wind caught one of the establishment’s large steel umbrellas. Turning it into a missile. Projecting it across the road. Gouging the shiny silver surface of my car.

Meanwhile, this January, share-market portfolios continued to enjoy the bull run from 2019. A year of rises after corrections in 2018.

Then the coronavirus hit! Out of nowhere. Like a message from above.

The world’s mood can turn in an instant. Just as a valued car must be given over to the panel beater.

We’ve now seen the biggest drop in global share markets since the opening salvos of the 2008 Global Financial Crisis.

Such moments can be a good time to buy equities. But there are a few questions you need to ask.

Are we at the bottom, or is this part of a larger, more sustained fall?

The Dow Jones Index in the States, which many other markets take their cue from, has dropped more than 20% below its record close — which was only set last month.

Panicked sell-off is continuing after the World Health Organization (WHO) branded coronavirus a pandemic. The oil price shattered. And Trump announced a ban on travel from many European countries.

Some traders believe we’re only halfway to the bottom. Others see it reached already, with a rebound probable.

I’m seeing good companies on sale. And nibbling away with Buy orders. (You can get a view on what we’re buying in our Premium Research newsletter).

But when the wider market continues to pull down on bad news, share prices fall further…

We’ve now reached a jittery point. Should there be more bad news on the pandemic, ‘the bottom’ could sink lower and lower. More infections. The NBA suspending its season. Tom Hanks holed up with the coronavirus.

Yet, the real fear is the fear of the unknown. What is around the corner?

What is the financial impact?

Stock prices depend on company earnings. And those earnings continuing to grow.

Many companies were projecting earnings rises over the year within a range of 5-10%. Bullish stock prices looked forward to that.

We don’t yet know the impact on earnings. Early reports from some travel and hospitality businesses suggest revenues could be down 20% or more. Which warrants the falls we’ve seen.

But some businesses get affected less than others. And those stocks may rebound more quickly when the earnings reporting season reveals that.

For example, one of our holdings owns shopping centres in Europe, anchored by large supermarkets. Given the pressures already on retail, and now new reluctance — or in some cases bans on visiting stores — I became worried.

Yet, in this case, monthly supermarket sales actually ticked up over half a percent. Put down to panic-buying, especially of sanitary items.

Right now, the market is falling on fear of an earnings cliff and a global recession.

You need to do your homework and work out which businesses may be able to keep earnings up over the next couple of quarters.

And there’s also the other side of the news coin. Government fiscal support. Emergency monetary policy.

The other night, the Bank of England made a shock base rate cut of 50 basis points, down to 0.25%. The market starting storming ahead. Until the pandemic declaration by the WHO stopped that in its tracks.

So watch the news. But, more particularly, consider the impact of any developments (and promises) on company earnings.

 

 

How long will it take for values to start rising again?

Past experience suggests a major market correction can take 4 months to recover from. Looking at the Dow Jones Index, that market has eroded over a year of gains.

Again, it’s much harder to predict the depth of this correction or the recovery time. Because analysts are struggling to assess the impact on earnings.

The other factor is the role that government stimulus will play. Can these moves ease earnings pressure?

Of course, what will propel rapid recovery is the end of the ‘risk event’.

The scenarios have a spectrum.

On one end of the spectrum, the best-case scenario is for coronavirus cases and deaths to stop. A vaccine gets found. The disease disappears. As SARS did.

On the other end of the spectrum, there’s the worst-case scenario  the epidemiology prediction of some 0.5% of the world’s population getting wiped out.

What about the risk of certain businesses failing?

Flybe, the UK regional airline, recently went into administration. This is no surprise. The business was already under a rescue package. So the coronavirus pandemic is the final tap that breaks the egg.

There is nothing worse in a portfolio than seeing a company’s share price collapse. Because it couldn’t trade through difficult conditions.

Governments may step in to save major banks — as they did during the GFC. But not necessarily airlines or other businesses.

This comes back to trying to select and add to your portfolio great businesses to begin with. Of course, no business is perfect. And no amount of study of past financials can reveal exactly how they’ll go in the future.

But there are a few things I look for:

  • Great margins and large, stable customer bases.
  • Asset support in the form of land and buildings likely to appreciate.
  • No debt — or low debt that is well-supported, even in a downturn
  • Experienced management that knows the business inside out.
  • Company directors buying their own company’s shares during dips like these.
  • Covered dividends, sharing some profits with shareholders. Unless the business is purely growth-focused — where total reinvestment may be expected.

When you find such businesses on sale, then those stocks can be worth nibbling away at during the dips. With a view to enjoying long-term recovery.

I’m monitoring several such businesses in our Premium Research newsletter.

The road ahead

Now in an ideal world, your car remains pristine. The market keeps going up. A coterie of your favoured stocks pay you regular and growing dividends.

That ideal world just got shattered.

But we have proven time and time again, the pieces can get put back together. And portfolios could end up stronger because of it.

The restaurant’s insurance covered my car.

Unfortunately, there is no insurance against market losses. But unless you need to sell, those are just paper losses. The real value is in the businesses and their ability to keep earning.

We need to keep the lights on. That’s what we’re ultimately invested in.

 

Regards,

Simon Angelo

Editor, WealthMorning.com


Simon is the publisher at Wealth Morning and has been investing in the markets since he was 17. He recently spent a couple of years working in the hedge-fund industry in Europe. Before this, he owned an award-winning professional-services business and online-learning company in Auckland for 20 years. He has completed the Certificate in Discretionary Investment Management from the Personal Finance Society (UK), has written a bestselling book, and manages global share portfolios.


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