Update

The Bull Becomes the Bear: Time to Buy?

During 2015-2018, I spent a good deal of time driving across Europe. It’s mostly safe. But you do hear of some horror stories.

The worst was a family from my neighbourhood.

They packed up the car. Drove on to the ferry. And headed to Spain during the long summer holiday.

Barcelona’s ‘thinking bull’. I prefer this to Wall Street’s just ‘bull’. Source: Wikipedia

On the outskirts of Barcelona, a BMW drove alongside them. They didn’t really notice.

A few moments later, a tyre burst. Dad pulled over. Rolled up his sleeves. Ready to change the flat.

That’s when the BMW pulled in front. Two ‘friendly’ Spaniards got out.

‘Need a hand, señor?’

I think you know how this goes…

They all piled out of the car. Mum, Dad, and the two kids. While the ‘good Samaritans’ changed their tyre. And while they were watching the jack go up and down, and drinking orange juice on the side of the road, the men systematically robbed them. Cash. Credit cards. Passports.

By the time they realised, the BMW had sped off. Oh, the police had seen the scam time and time again. ‘We can file your report for insurance. That is all.’

Well, this is how you may be feeling about the coronavirus meltdown. Midway into your journey, a terrible loss-event occurs. Driven by fears of a pandemic and a global recession.

But this is the nature of markets. It is part of the road. You navigate joyous gains and catastrophic peril.

And paper losses are only dangerous if you have to sell. Otherwise, they are just on paper. In time, they’re probably recoverable.

And for the moment — opportune.

We’re now facing a cluster of the biggest market falls since the 2008 Global Financial Crisis

Portfolios are down 20% or more. I know a couple of people already down $250,000-$300,000.

Is this time to join the panic sell-off before you lose more money?

No, it’s time for calm heads. To navigate a market disaster. And realise one of the biggest opportunities handed to investors in more than a decade.

As for our friends in Spain, the story doesn’t end there. The insurance company put them up in the nearest hotel, which happened to be a 5-star luxury premises on a golf course. They are now much more seasoned drivers when they take to the Continent.

The event hasn’t stopped them travelling. Just made them safer, stronger, and braver.

Thinking bulls.

Why have stocks fallen so heavy? And where are the opportunities?

We have a perfect storm. A bit like that flat tyre. Then the robbery.

There are several factors that have come together:

• Markets were already jittery over the run of a 10-year buy-and-hold bull run.
• Fear of a pandemic is locking down consumers and preventing them travelling and spending.
• Infection numbers and the death toll grow every day.
• A breakdown of Saudi-Russia OPEC talks has led to dramatic fall in the price of oil.

In these sort of events, asset prices will move up and down. Your main concern is whether you have any stocks in your portfolio where the coronavirus impact could actually lead to the business going into administration.

Flybe — the regional airline — is one such company in the UK. It was already struggling. And empty jets pushed it over the edge.

Within our portfolio, we’re seeing paper losses. But as yet, little impact on dividends. Nor, in most cases, are we seeing any serious threat to the business case.

So we’re holding on. And using the value opportunity to top up.

BlackRock, the world’s largest asset manager, put the situation into reality.

A spokesperson stated on Monday:

‘Market moves have been reminiscent of the financial crisis. But we don’t think it’s 2008, as the economy and financial system are on much stronger footing.’

Let’s unpick some of the causes to get a handle on the risk. And try to work out whether we’re near the dust-strewn bottom. Or ready to rise.

The 10-year bull market

This would be a concern if we’re seeing 1987-like P/E ratios of 50-60 or more across the board. We’re not. Although stock prices were high, there were still patches of value. And strong dividend yields in a world where yields were drying up in other areas.

We also had a correction in 2018. The MSCI World Index was down –10.44%. And the 2019 jump of 25.19% has also factored in recovery of that.

What we are seeing is increased volatility. And this is occurring in currency markets. Property markets. Especially stock markets.

Economies operating on very low interest rates are a bit like individuals running on steroids. There can be big ups and downs.

Ideally, we’re now looking for government stimulus. To help correct property bubbles, support coronavirus-hit businesses, and reduce business taxes and runaway compliance.

This alone could put the economy and market back on a rising track.

A pandemic and a rising death toll

Much of the COVID-19 fear is fear of the unknown.

The initial reports suggested a 3% death rate. Perhaps some 20x deadlier than the common flu.

That is serious. Dangerous. But it’s likely the numbers got skewed due to the focus on deaths. Many of which were already amongst sick and immune-compromised people.

More recent numbers from South Korea suggest a death rate of only 0.6%. Just a really bad case of the flu. And the stockpiling of hand sanitisers and face masks may actually be worse for those with weak immunity. Cloistering their systems from fighting bad bacteria.

We don’t yet know if we’ve overreacted to the fear of the unknown. If we have, and this risk event disappears in time, the next little while could represent an amazing buying opportunity.

Oil price crash

What tends to happen when the oil price tanks is that big producers face massive share-price slides. Since companies like Shell [LSE:RDSB] and BP [LSE:BP] are huge, this pulls indexes down. And spooks all investors.

As I write, these companies are down nearly 20%!

But research shows that, in time, low oil prices helps a plethora of other businesses. Consumers have more money to spend. Input costs fall. Margins improve.

We’re already seeing that with a crash victim in our portfolio — Tassal Group [ASX:TGR]. It was initially down hard. Now it’s bucking the ASX demise and heading for a 7% jump at the time of writing.

Because when you’re selling Tasmanian-farmed salmon and seafood, mostly within Australia, lower oil costs can help. People need healthy eating options.

So let’s see where we’re sitting. And where the opportunities are:

Portfolio update

Tassal Group [ASX:TGR] prepares to pay our second dividend. We take the opportunity to top-up again at 3.51. Demonstrating that repeat top-ups during a period of falling prices can reduce your carrying cost. And increase your potential gain when the market recovers.

The ex-dividend date is March 13, 2020, with a payable date of March 31, 2020. The declared rate is AUD 0.09 (per share).

Remember: beyond the systemic market drop, risks around the seasonality of fish farming remain with this investment. This can affect the share price and the ability of the company to pay dividends.

NewRiver REIT [LSE:NRR] got hammered down by short sellers. These are traders who believe the share price could go lower in the current market, then bet against it by selling stock they don’t own. And then buying it back at a cheaper price.

No doubt, retail in Britain is in for a tough time, exacerbated by the coronavirus.

I see my own holding of NewRiver earning some short-seller fees through broker yield enhancement. And the price has fallen.

Perhaps what short sellers miss is that NewRiver is not overly lumbered with large megamalls. They focus on convenience retail. Community pubs. And development and divestment opportunities.

Occupancy, at least since the last report to the market in January, increased to 96.1% through Q3. Which enabled the company to maintain its attractive dividend. And hopefully remain in reasonable shape to get through the coronavirus hit.

Of course, it’s not going to be easy. There is considerable pressure on NewRiver’s retail tenants. The risk is that some could got out of business and reduce that critical occupancy number in the next couple of quarters. Which would put pressure on the dividend and share price.

Yet, to date, this REIT has demonstrated resilience, carving out a niche in a difficult sphere. It may well be that panic-buying of toilet rolls and hand sanitiser provides a boost to supermarket and pharmacy tenants.

In my view, value is evident in relation to the risk.

Another UK holding has been hit with this seasonal virus — big insurer and asset manager Aviva plc [LSE:AV.]

Since the business is entwined with the markets via managing pension funds and the like, it has a relatively high beta of 1.13. Meaning when the markets go down, Aviva may go down a bit more.

Coronavirus-wise, the impact since the report of 5 March appears to be mild. Only £500,000 was paid out at that point for COVID-19 related travel claims.

But the business has been hit with a double-whammy following Storm Dennis. After this event, it paid out more than USD $472 million for flood damage in England.

You see, in an ideal world, insurers collect premiums and seldom need to pay claims. And markets just keep going up, while companies reward their shareholders with ever-increasing dividends along the way.

This world is not an ideal one. It has to be navigated.

At a current P/E ratio of 5.4, Price to Book of 0.8, Debt to Equity in the range of 55%, and a projected dividend yield of around 10% — Aviva is looking rather ideal on paper.

Of course, there are risks. This insurance behemoth has struggled to grow over the past few years. Its future trajectory may depend on a restructuring programme. And the dividend is not guaranteed as it goes through this process.

Meanwhile, coronavirus threatens the business with an avalanche of claims — particularly in the travel area — along with hefty stock-market exposure in the asset-management business.

Yet, this week, what was lost in the market meltdown was a critical piece of news from last week:

Aviva beat its earnings targets by 17%. Operating profit rose to £3.2bn following cost-cutting and rising premiums in Europe. Return on Equity increased to a healthy 14.3%.

The company announced it is prepared for impacts from the coronavirus. And analysts retained a consensus price target of 470 pence.

Our Italian holding — Immobiliare Grande Distribuzione [BIT:IGD] — has come under the most pressure from the coronavirus.

The Italian market got slammed after the country went into a national quarantine lockdown, restricting all travel and closing schools and universities until April 3.

The FTSE MIB was down nearly 10%.

IGD — whose business is shopping malls in Italy and Romania, often anchored with supermarkets — followed the market down.

Concerning for us is that malls must now close on weekends.

Still, this should only be until April 3. And this business is now looking ridiculously cheap. With a Price to Book ratio of just 0.5. And projected dividend yield more than 10%.

But if shopping malls empty out, the company could come under considerable pressure. Particularly since it does carry significant Debt to Equity (at about 100%).

Anecdotal evidence suggests we’re not at the point of empty supermarkets, hypermarkets, and malls. Rather, they are just full of people wearing face masks. The price is factoring in a lot of fear.

As of December 31, 2019, IGD actually posted some quite promising results. Net rental income was up 10.1%. Occupancy in Italy was holding at 96.9%, and in Romania at 97.6%. Average cost of debt was only 2.35%. The retailers themselves posted an average mall sales increase of 0.5%.

The EPRA NNNAV measure of asset value shows assets worth €10.92 per share. A dividend of 50 euro cents is proposed for May. You can view the results presentation here in case you missed it.

However, there is real risk that coronavirus-stricken Italy may tip some malls into trouble. So if you do buy or top up, you need to consider the potential for trouble if the virus situation lives up to the sell-off panic.

We’re a little more optimistic. And topped up the model portfolio at the 8-year low point of €4.68.

But Italy is far from ‘out of the woods’ if the virus does spread here.

Hold, Buy, or Top-Up at your own risk and in line with your risk profile.

Here is our current portfolio showing the coronavirus damage. Our ‘Buy Up To’ prices are updated to reflect that:

 Current as of 10 March 2020 at 9pm GMT.

Maybe you were expecting more concern from me?

I’ve personally seen my own portfolio drop hundreds of thousands of dollars.

This is just part of being in a dynamic market. And living in a volatile world. We need these burn-offs to find value and new opportunity.

We don’t know when the bottom will come. Or how protracted a bear market may be. Or how long a turnaround may take. The past, as they say, cannot predict the future of markets.

I suspect the brave and those with cash to deploy will, at some point, reap the lion’s share of any gains. Once the risk event is gone, the bull market may run again.

It’s time for thinking bulls to make their moves.