Where to invest

Uncertainty levels always feel sky-high when financial markets suffer bouts of extreme stress. It is natural for people to lose confidence in their understanding of how things should work when paradigm shifts occur. Here are five strategies that help to sift through market noise and segment the risks and opportunities for portfolio construction:

Dinosaurs are companies compromised by flawed business models or industries in structural decline, also known as sunset industries. They become easily recognisable if you take a long-term view.

Examples include the paper industry as the world goes digital; office space as people work increasingly virtually; and the platinum sector as fossil fuel burning internal combustion engines increasingly make way for greener electric vehicles.

Invest in segments of the market that are riding structural tailwinds. These are companies and industries supported by long-term secular themes that might accelerate because of the pandemic shock.

Examples include accelerating insurance sales in underpenetrated, fast-growing markets (Asia Pacific) as the dangers of being uninsured stay fresh in peoples’ minds and companies in the internet sector that have benefited from “lockdown era” changes in consumer behaviour.

These are opportunities where companies suffer short-term dislocations but their medium to long-term prognosis is unchanged. This is where the long-term investor’s time advantage becomes acute.

Most market participants will sell on bad news and return when the news changes. That strategy carries price risk. Examples include a few quality names in the beverage, restaurant and hospitality industries.

No one has a crystal ball, but there are some secret weapons that can help longterm investors manage uncertainty – management, diversification and time.

Original investors in Naspers bought into a newspaper business. If they didn’t sell, they became owners of an excellent SA pay-TV business.

Known unknowns include a series of emerging trends and behaviour shifts that can profoundly affect societies and economies in the long term. These risks are identifiable today, but difficult to predict with certainty.

Examples include potential unwinding of the globalisation trend of recent decades; and the human employment consequences of accelerating trends in use of intelligent technology and machines.

Nick Balkin is portfolio manager at Foord