PICK­ING STOCKS AF­TER A PAN­DEMIC

Your guide to post-Covid in­vest­ments

Sunday Independent (Ireland) - - SUNDAY BUSINESS - Louise McBride

THE pan­demic is still clearly a force for in­vestors to grap­ple with. Wor­ries that the resur­gence of the coro­n­avirus could force coun­tries to limit or re­verse their lock­down-eas­ing mea­sures saw Euro­pean and US stocks wob­ble in re­cent weeks. This sum­mer has seen an alarm­ing num­ber of Covid19 cases in the US, Brazil, Rus­sia and In­dia. All the same though, the hope is that the world is now in a bet­ter place — and that it un­der­stands more about the virus — than it did in the early months of 2020. So as many coun­tries slowly emerge from lock­down re­stric­tions — and hope­fully put the worst of the pan­demic be­hind them, how might in­vestors play the stock mar­kets?

THE UP­BEAT IN­VESTOR

Stock mar­ket in­vestors need to dif­fer­en­ti­ate be­tween the com­pa­nies which will sur­vive the Covid-19 eco­nomic fall­out — and the ones which won’t, ad­vised Peter Brown, co-founder of Bag­got In­vest­ment Part­ners. “The onus is on in­vestors to look at in­vest­ments and ask if they have a fu­ture,” said Brown.

Some of the shares which have been hit hard­est by the pan­demic could prove to be good op­por­tu­ni­ties — as long as the shares are in com­pa­nies which sur­vive.

“There are a num­ber of com­pa­nies whose share prices are still heav­ily de­pressed but who will sur­vive the Covid pan­demic,” said Brian O’Reilly, head of in­vest­ments with Me­di­olanum As­set Man­age­ment. “Com­pa­nies such as Siemens and Gen­eral Elec­tric have ob­vi­ously seen their share prices hit hard as economies went into lock­down and eco­nomic ac­tiv­ity ground to a halt.”

An­other com­pany O’Reilly sug­gested as a pos­si­ble in­vest­ment op­por­tu­nity is AB In­bev — the Bel­gian beer com­pany which makes Bud­weiser and a range of other brands of beer. That com­pany’s share prices has fallen sharply since the coro­n­avirus cri­sis started.

The shares of Euro­pean and Ir­ish banks, such as AIB, could also gain ground as eco­nomic re­cov­ery sets in (if it does) and prove good in­vest­ment op­por­tu­ni­ties as a re­sult, ac­cord­ing to O’Reilly. So too could CRH and other busi­nesses likely to ben­e­fit from big gov­ern­ment con­tracts to build roads, schools and so on, he added. “I ex­pect to see gov­ern­ments around the world in­vest heav­ily in in­fra­struc­ture af­ter Covid,” said O’Reilly.

Of course, any pro­longed re­ces­sion fol­low­ing the pan­demic is likely to make it harder for em­bat­tled com­pa­nies — and their shares — to re­cover. For op­ti­mistic in­vestors who ex­pect a vac­cine to be de­vel­oped and eco­nomic re­cov­ery to kick in, O’Reilly rec­om­mends a ‘bar­bell’ ap­proach. “With the bar­bell ap­proach [in the con­text of Covid], in­vestors would keep in­vest­ments in the com­pa­nies and in­dus­tries that are least im­pacted by Covid and have ac­tu­ally gained mar­ket share due to the lock­down re­stric­tions — such as tech­nol­ogy and com­pa­nies like Mi­crosoft and Ama­zon,” said O’Reilly.

“How­ever, in­vestors would also grad­u­ally start adding po­si­tions for the day when a vac­cine will be found and our lives re­turn to nor­mal. In that re­gard, the other side of the bar­bell can fo­cus on in­dus­tries which have seen their share prices hit the most [but which will still sur­vive].”

Such in­vestors how­ever need to be pre­pared to weather some more stock mar­ket volatil­ity.

“Covid-19 has not gone away and un­til a vac­cine is de­vel­oped, stock mar­kets will stay volatile,” said O’Reilly. “Most ex­perts agree that the ear­li­est a vac­cine will be de­vel­oped is by next year, but if the mar­ket be­lieves a vac­cine is be­ing de­vel­oped, it will start to price that into in­vest­ments long be­fore the vac­cine is avail­able.”

Value in­vest­ing — where in­vestors seek out stocks and shares that are trad­ing at a sig­nif­i­cant dis­count to their in­trin­sic value — would also be a good in­vest­ment style to adapt ahead of a re­cov­ery, ad­vised O’Reilly.

“What we see time and time again is that in a re­cov­ery, the parts of the stock mar­ket that were priced for fail­ure do best once in­vestors get more con­fi­dent that the re­cov­ery is on a more sta­ble foot­ing,” said O’Reilly. “Cycli­cal in­dus­tries — like in­dus­tri­als and con­sumer dis­cre­tionary com­pa­nies — will also do well in a re­cov­ery.”

As is al­ways the case in in­vest­ments, putting all of your money into one or a small num­ber of shares is very risky. In­vestors should in­vest in shares through a well-di­ver­si­fied port­fo­lio and get in­de­pen­dent fi­nan­cial ad­vice be­fore mak­ing any ma­jor de­ci­sions.

THE WOR­RIED IN­VESTOR

For in­vestors wor­ried about a sec­ond wave — or in­deed sub­se­quent waves — of the virus, the best ap­proach could be to stick with what has been per­form­ing the best in the pan­demic, ad­vised O’Reilly.

“In­vestors will grav­i­tate to­ward those com­pa­nies and in­dus­tries that have the most earn­ings and sales sta­bil­ity,” said O’Reilly. “Tech­nol­ogy has been the clear win­ner with peo­ple shop­ping on­line and work­ing from home — while more cycli­cally ex­posed com­pa­nies have borne the brunt [of the pan­demic]. Health­care is also an area of in­ter­est given the search for a vac­cine. In con­sumer sta­ples, the likes of Proc­tor and Gam­ble — which man­u­fac­ture every­thing from wash­ing pow­der to tooth­paste — have been rel­a­tively well in­su­lated from the pan­demic.”

Gold — an in­vest­ment in­vestors of­ten flock to when mar­kets are ner­vous — is also an op­tion for those wor­ried about a sec­ond wave or pro­longed post-Covid re­ces­sion. “If in­vest­ing in gold, go for a gold Ex­change Traded Fund [ETF — es­sen­tially a bas­ket of shares] or a gold min­ing com­pany with low debt,” said Brown.

Bear in mind though that gold may not per­form as well as other in­vest­ments once eco­nomic re­cov­ery sets in. “More de­fen­sive as­sets like gold, sov­er­eign bonds [is­sued by a na­tional gov­ern­ment] and qual­ity stocks [which are gen­er­ally more re­li­able and less risky] will not keep pace with the more cycli­cal parts of the mar­ket that will do bet­ter in a re­cov­ery,” said O’Reilly.

Re­gard­less of whether you are an op­ti­mistic or pes­simistic in­vestor, it is very im­por­tant to take a long-term ap­proach. “In­vestors should ig­nore the noise and re­mem­ber that long-term in­vest­ing pro­duces good out­comes,” said Will Sparks, per­sonal fi­nan­cial plan­ner with Spark­sWealth. “Tin­ker­ing with your in­vest­ment and try­ing to time the mar­ket has never worked.”

‘NEW NOR­MAL’ IN­VESTOR

It re­mains to be seen what long-term im­pact the pan­demic will have on our lives. “The cri­sis has ac­cel­er­ated a num­ber of trends that will stay with us — such as the in­creased use of tech­nol­ogy in our ev­ery­day lives,” said O’Reilly. “Re­mote work­ing will also be­come more preva­lent.”

The growth in re­mote work­ing has been good news for in­vestors in many of the big tech com­pa­nies — Mi­crosoft’s share price for ex­am­ple has in­creased by more than 40pc over the last year, de­spite the pan­demic.

“Our de­pen­dence on big tech com­pa­nies to work and live is now stronger than ever and we see this de­pen­dence man­i­fest­ing it­self with the con­tin­ual growth of big tech,” said Sparks.

A long-term move to­wards re­mote work­ing would spell bad news for some in­vestors though.

“I wouldn’t be in­vest­ing in com­mer­cial prop­erty funds,” said Brown. “We’ve got a con­sid­er­able num­ber of busi­nesses that won’t re­open. We’ve got a con­sid­er­able num­ber of peo­ple who are now work­ing from home. So com­mer­cial prop­erty could be in a lot of trou­ble.”

WATCH LIST

There are a num­ber of Covid-19 de­vel­op­ments in­vestors should watch keenly in the com­ing months. They in­clude trends in Covid-19 cases, the im­pact of the hol­i­day sea­son on Covid num­bers, how se­vere any sec­ond wave of the virus is — and how gov­ern­ments re­act to such a wave, and how the pan­demic pans out in the US. “The US econ­omy and stock mar­ket is the back­bone of the global econ­omy,” said Sparks. “So how the US con­sumer re­acts to re­stric­tions and bounces back from the cri­sis is cru­cial.”

Some be­lieve there are a num­ber of years of poor eco­nomic growth and high unemployme­nt ahead. In­vestors should how­ever re­mem­ber that this cri­sis, like pre­vi­ous ones, should in time pass.

“There is a ten­dency to be overly-neg­a­tive dur­ing a cri­sis,” said Sparks. “We are so of­ten an­chored to cur­rent sen­ti­ment and in­for­ma­tion that we can­not ra­tio­nally see brighter times ahead.” Hope­fully in­vestors will see more bright days than gloomy ones in the com­ing months.

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