Possibilities, perils and prizes when investing during pandemic

• As markets bounce back, watchers ponder whether to plunge in and which sectors are best

There is panic. Uncertainty. Fear. The global economy will have its worst recession since 1929. The world as we know it will never be the same again.

“It’s the same every time,” says FNB Wealth and Investments analyst Wayne McCurrie who, having been in the investing field for 32 years, has seen a few market crashes. In fact, he sees it as a regular occurrence, something that happens every eight to 12 years.

“The reason this time is different — usually it’s an economic problem — and the speed at which it happened is also different, but it shares many similar characteristics with what we’ve seen before,” McCurrie says.

“There is nothing unusual about the current bear market.”

A bear market is typically defined as when an investment falls 20% or more from its 52week high, and that has been the case across world markets as the global economy grinds to a halt amid efforts to contain the spread of the coronavirus.

Now as markets begin to bounce back, the investing community is in a veritable tizz over whether to buy or be prudent and sit tight.

“There is only one thing you really know in investment, and that is current valuation of the shares,” says McCurrie. On that basis, he says it’s a great time to buy shares.

Though you might sweat it in coming months (the market might test the bottom again), in two or three years he believes today’s investors will be pleased with their returns.

Banks and property company valuations are extraordinarily cheap at the moment, he says.

Some SA banks have priceto-earnings ratios of about four — half what they were at the peak of the global financial crisis, he notes.

BETTING ON BANKS

Bank profits are likely to be severely curtailed over the next six months and they could easily experience small losses. But if they move back to the same level of profitability in the next two years or so, investors will realise extraordinary earnings yields, McCurrie says.

Distributions of property companies will also take a hit, but if they can get back to their current distributions in three years or so, investors will be sitting pretty, he says.

“Everyone is guessing. Me included,” he says. “But I think it’s fair to make one major assumption — that we will return to some form of normality in two to three years’ time.”

Before investing in any company, one should consider a suite of factors — from the state of their balance sheet, their capacity to get through the lockdown and their ability to ramp back up quickly thereafter, even in changed circumstances, says Cannon Asset Managers CEO Adrian Saville.

When considering who might come out stronger on the other side of the pandemic, Saville says obvious candidates abroad are the likes of Alibaba, Microsoft, Visa and Intel. Local equivalents are the likes of Old Mutual, trading at half its embedded value, and Altron, which earns a third of revenue globally and has recently announced the unbundling of Bytes Technology Group.

He warns against buying into the hype of food and drug retailers and health-care firms that will not necessarily benefit beyond the lockdown.

Saville sees diversification as an attribute for a worthy investment candidate. But when it comes to a global pandemic such as this, it’s not geographic or even currency diversification that is prized but rather industrial diversification.

Investment experts broadly agree investors should be wary of investing in companies with high debt, such as Sasol and Hyprop. But generally speaking, SA corporates are not geared, McCurrie notes.

Even companies in the mining sector, having overindebted themselves in the past, have strong balance sheets and have kept off the acquisition trail despite a recent surge in commodity prices.

Saville says a rule of thumb is to consider a company’s vulnerability to financial stresses and how quickly it liquidates its assets.

Clothing retailers, for example, will struggle to move stock even at hugely discounted prices if the stock is out of season. “But if you had inventory you can freeze and in six week will be as relevant — like smartphones and laptops, for example — then you just have to carry the balance sheet for those weeks.”

McCurrie agrees retailers will have a tough time in future. Big food retailers ought to be OK. He sees the likes of Famous Brands struggling after the pandemic, as restaurants will take time to come back to full occupancy.

Sasfin’s David Shapiro is convinced the world will be forever changed by Covid-19, but he does expect that investment thinking will recognise some new opportunities.

Health is going to become an utmost priority and a lot more spending will be funnelled there.

Beneficiaries after the pandemic will include public health, medical equipment manufacturers and Big Pharma, he says.

Big tech, streaming and gaming, which have proved so critical during lockdown, will also be winners, while education is poised to take a big leap thanks to remote learning.

There is no denying SA equities have rarely been this cheap. But is it time to commit?

“The shock of the virus is finished — even if deaths go up, that initial reaction is done with,” Shapiro says.

However, he believes the recovery in recent days is a little too speedy.

“The news is not all that good. You want to know the medicine that (has been) injected into the economy is working — are all the [rescue and stimulus] programmes working to lift the economy, to prevent mass unemployment, mass bankruptcy? I don’t think we have a clue yet.”

BUT I THINK IT’S FAIR TO MAKE ONE MAJOR ASSUMPTION — THAT WE WILL RETURN TO SOME FORM OF NORMALITY IN TWO TO THREE YEARS’ TIME