Balance sheet erosion and impact on share prices
As the virus has grown, so balance sheets have shrunk. In this global health crisis, it is not just people who are ill. Against conditions already uncertain with a trade war and Brexit, this crisis has shaken the bones of the stock market, exposing fragile finances at more than a few firms.
Some zombies, unable to cover interest with earnings, won’t rise again. For the sectors most exposed to the shutdown, such as retail, travel, and leisure, profit warnings and liquidation are a daily reality. US Fed chair Jay Powell expects “a prolonged recession and weak recovery”.
Japan, Germany, and Italy, already deep in recession, are testament to that.
Worldwide, some 20 per cent of rated companies have been downgraded this year, with big names like ITV likely to be graded junk by the rating agencies, and subsequently falling short of meeting many investor’s requirements.
A long road lies ahead, but that isn’t to say there isn’t opportunity along the way. Warren Buffet famously said of the 2008 financial crisis: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful”.
Prudent investors not averse to this risk are already cashing in on the fire sale of underpriced assets. Markets rallied last month to make up more than half of March and February’s losses, driven by a spike in retail trading volumes. At Fineco, our number of executed orders more than doubled, while the number of new FinecoBank customers who have started trading since March is treble the usual average.
This is less ‘buy-low-sell-high’ and more a case of seeking long-term value in innovative businesses whose merit might not manifest itself this year. Investing in businesses that had a healthy cash balance coming into this crisis, that hold a dominant market position, or are creating technology that has become more relevant due to the shutdown, are likely to bounce back and inject momentum into your portfolio.
US firms like Apple and Facebook are good value for some of these reasons. They are natural monopolies, have more than enough cash on balance to outlast the crisis; the same can be said for Alphabet and Microsoft. These big names are staples, and already well on the road to recovery. But each is still short of its pre-covid price. There is no reason they will not recover.
There will always be an element of risk, but when it comes to mitigating against an outcome you hadn’t planned, sectoral and geographical diversification will help. Investing and trading in both high growth and more stable companies with a good history of dividend payments will fortify your portfolio against the uncertainty.
Games Workshop, the miniature toy maker, is a good small cap with a healthy dividend history Likewise, AIM darling Blue Prism Group is bouncing back well. Stateside, pharma firms Novartis and Amgen have experienced relatively low volatility during these unprecedented times, and each offer consistently increasing dividends. There are undoubtedly thousands of examples of underpriced firms in US and UK markets, and now is the time to take advantage
The rules have changed. It is typical of crashes for investors to take a short-term view. But taking a long term perspective with a well-diversified portfolio will perform and control volatility far better.
Fears regarding the long-term prosperity of already sound companies during a crisis proved misplaced within living memory. Many firms not only survived 2008 but thrived, consolidated, and catalysed a decade of prosperity. Those that collapsed did so with Darwinian efficiency; not premature, but overdue. For investors, picking the survivors – those green shoots amid the ashes – is the difference between success or not.
Having a platform partner with local knowledge and market-leading low commissions on UK and US equities increases your chances of making the most of a landscape fissured by events beyond our control.
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