The coronavirus outbreak is, without a doubt, the most talked about topic on everyone’s lips now. We all have been inundated by the news and topics related to this microscopic threat: the number of cases in Singapore and various parts of the world; its asymptomatic trait that makes it even more undetectable; the difficulty in getting masks and sanitizers from retail outlets, and so on.
Whilst I encourage all to have good hygiene practices and carry out preventive measures for yourself and your loved ones, one constant is clear: life has to go on, even on the investment front. In this blog post, I shall share some of my views as well as strategies on navigating this period.
The Markets And Outbreaks
The markets traditionally have an inverse relationship with epidemics, and it is due to the common emotion of fear. Yes, fear of not only what an outbreak can do to you, but also what it will do to everything else. When there is an epidemic (especially those that has no known vaccine or cure) and almost everyone talks about it, the impact, real or imagined, is felt. Self-preservation takes over and most everyday activities will be slowed down or halted at the worst. With this, most industries and sectors will, like a domino effect, be affected and thus the perceived economic outlook is definitely not good.
To bring things to a comparison and a parallel, most of us tend to look back at the last instance of a similar scenario, and you guessed it, the SARS epidemic of 2003. Between the months of March and May, where it was considered a crucial period, the Straits Times Index went down to a low of almost -10% using 2003 year-to-date (YTD) reckoning. However, after that period, it recovered and finished off the year with +32.08% 2003 YTD (see Figure 1).
Fig. 1 – Straits Times Index, 2 Jan to 31 Dec 2003. Source: Yahoo Finance.
While it is good to see the past for lessons to be learnt and to glean some experience, the future is still a big unknown to us. This epidemic caused by the coronavirus, dubbed as the 2019 Novel Coronavirus (or the Wuhan Coronavirus based on its first occurrence in the Chinese city), was just slightly over a month, yet it had infected numbers far surpassed to that caused by SARS. As of the writing of this post, the World Health Organization had declared it a global health emergency and some countries are imposing or imposed travel restrictions. How all this will pan out eventually, we are not very sure.
But, there is bound to have an investment silver lining in situations like this. Let me share with you what they are and which investment strategies and thoughts to apply. Bear in mind that the following strategies are not mutually exclusive and you could combine them and/or their sub-points together.
#1 Look At The Winners
Masks and sanitizers are in demand now, judging from the numerous “out of stock” notices displayed in pharmacies, supermarkets and hardware shops. Clearly, manufacturers that produce masks, sanitizers and even gloves are having a profit field day. Expanding this thought, it is deemed that the entire medical and healthcare sector and industry will stand out as winners. In our local Singapore Exchange, we had seen some counters in the abovementioned fields rising in price over the past few days.
Going after winners (companies, sectors, regions and asset classes alike) is a bit difficult, particularly at the point where they are about to take off. You need to have a really, really good foresight of what is coming, if not then you need to be an early mover to get in cheap before the others start to move in. Sometimes such a strategy can be seen as a trading one, where profits can be realized once a set price is reached.
Still, there is some plus points in looking at winners. If a proper fundamental analysis (FA) is conducted and the company shows some potential over a long period, then it is worthwhile to invest in it, even though its share price is rising at the moment. As long as the price is well below your derived value after FA, you may still consider going into the company.
#2 Look At The Losers
With travel restrictions and city-wide lockdowns, some business segments are bound to lose big. Transportation, retail (physical ones), hospitality, etc. are likely to take a big hit, for a lot of people would not want to risk being exposed. Given the fact that China is a substantial source of tourists to a number of countries, those destinations may feel a deep dent in tourism revenue.
This is a good time to look at companies with direct and indirect exposure to the sectors and industries highlighted in the previous paragraph. Using FA, it is prudent to sieve out those that can withstand this down period (maybe for at least a year or two) from the ones who are maybe on the brink of liquidity crisis. A strong free cash flow, adequate liquid assets and/or diversification of revenue streams are some of the points to look out for when analyzing a company.
On the asset class front, equities on the whole are dipping, so on a broad front it is good to initiate some small positions in index ETFs and carry out averaging down or up when necessary. It is up to you to decide on the points of entry based on the index numbers, like the example of my 10-30 rule in my ebook1.
#3 Look From The Sidelines
Sometimes doing nothing is considered as doing something. You may want to adopt a wait-and-see approach, as probably the influx of news and numbers may cloud one’s decision-making process and it is hard to have a good guesstimate on how things will go.
If you still want to do something, then you may want to adopt a passive index investing approach, where its proponents would just rebalance their portfolios at a set date and forget about it until the next cycle. You can create a new portfolio dedicated to passive investing or add in asset class ETFs and slowly transform your portfolio into a core-satellite one2, if you had not started yet.
Stay safe, stay healthy and stay invested.
1 – The Bedokian Portfolio, p119-120
2 – ibid, p122-123