How to invest for a pandemic

Are there things investors can do to sure up their portfolios, or even make the most of a few opportunities? Or are the unknowns just too great?

Nerve-calming leadership is needed to steady the markets (AFP/Getty)

Amid the anxiety, the lockdowns and the closures, there are serious questions about our finances, not least about our investments and pensions.

As global stock markets reel from coordinated but alarmingly strong fiscal action, the basic advice remains to not panic, investment horizons are long. Hold fast.

Surely with an indeterminate period of fundamental disruption, financially robust businesses and the funds that invest in them will be few and far between? Aside from mask and ventilator manufacturers, that is. So, er, now what?

“Over the short term, there’s little to say, as it depends on the evolution of the infection and the strain it puts on societies, supply chains and markets,” says George Lagarias, senior economist at Mazars.

“We expect the newsflow to remain challenging for the coming weeks as the virus is not predicted to peak until 10-12 weeks ahead in Europe. With half of Europe in a lockdown it hasn’t seen since war times, the Chinese supply chain severely disrupted and the virus only now spreading in the Americas, the economic pressures are expected to exacerbate.”

For any chance to really calm, markets are expecting more coordinated monetary and fiscal action, and – more importantly – nerve-calming leadership. And that coordination and global leadership are in short supply these days – a fact that markets are anything but oblivious to.

“It is difficult to see five or six months ahead, given the effect it might have on societies and consumer behaviour,” adds Lagarias.

“So we must take into account all of our history so far. A history that includes cold wars, oil shocks, nuclear threats, global financial crises, banking crises, economic booms and busts, Vietnam, 9/11 and so on. Since 1950, on average, five years after entering a bear market (minus 20 per cent) the S&P 500 has been positive 70 per cent of the time and an average 17 per cent higher. For 10 years the numbers rise to 90 per cent and 75 per cent respectively.

“Do we still trust long-term statistics? Insofar as we believe capitalism will not end because of the coronavirus, then yes. And while the long term plays out, we make sure we plan sensibly for the future and adjust portfolios as much as we can to mitigate shocks.”

So what might that portfolio adjustment look like? And if we believe the economic sky is not going to fall in, where could the retail investor, perhaps with a little extra socially distanced time on her hands, look?

Focus on quality

“Given the scale of the global market sell off, now could prove an opportune time to buy quality stocks or to invest in funds with a quality tilt that have been dragged down in the panic,” says Laura Suter, personal finance analyst at AJ Bell.

“They are likely to continue to experience volatility in the short term, but the strength of their market position, their brand and their products or services could deliver generous rewards in the long term.

“Investors looking for quality businesses should identify those that tend to be capable of managing short-term uncertainties and volatility in order to prosper in the longer run to deliver sustainable growth. Generally speaking, high quality firms are consistently profitable, growing, and have solid balance sheets.”

That means it’s critical to differentiate between companies that have been sold off justifiably because they face large headwinds from the effects of coronavirus and those that have been discounted too far as a result of everything being dragged down in the market panic.

In other words, there’s no getting around the legwork – it’s time to dig into the underlying financials of the company in your sights.

“There are common measures of profitability, stability and financial health to look out for such as gross and operating margins, return on equity, return on invested capital, the volatility of revenue and earnings growth, debt, and the strength of cash generation measured by free cash flow,” Suter points out.

There are also more esoteric factors to consider such as strong brands that can weather the storm even in the face of increasing competition. That could be Diageo brand Guinness, or Reckitt Benckiser’s disinfectant Dettol.

It could also be intellectual property. For example, Google’s internet search algorithms are so effective that the website has become the de facto way to find stuff online, which pulls in piles of advertising money.

“The network effect enjoyed by Rightmove’s property portal is another great example. It has built the scale that makes it the first place home buyers look, so no property vender can afford to ignore it, thus drawing even more home buyers to its listings.”

Suter especially likes electronics designer Halma, the London Stock Exchange, specialist building products firm Marshalls, and Rentokil. In terms of funds, she likes Fundsmith Equity and the Lindsell Train funds.

Knife throwing

And what about the impact of the new locked-down normal?

“There’s a saying on Wall Street: “Don’t catch a falling knife”, which means don’t buy in the middle of a falling market. Buying amid volatility is very risky. However, even amid a lockdown, sectors that should post sales growth are consumer staples, utilities and home entertainment,” suggests Anthony Denier, CEO of trading platform Webull.

With soap, toilet paper and food flying off grocery store shelves, he believes companies to look at include Procter & Gamble and Kimberly-Clark, as well as Netflix, Disney, Slack and Zoom as more people start watching serious amounts of TV and discover remote working software.

Hold fast

“Companies built on debt are struggling to survive as lenders become less enthusiastic and customers less active. Frauds are starting to appear. Even good companies are under pressure, drawing on bank credit lines just in case,” adds David Miller, investment director at Quilter Cheviot.

“Could it be that China will come to the rescue as it did in 2008? The infection rate has been on a downward trend for several weeks and the stock market is recovering. Impossible to check, but it is thought that 80 per cent of manufacturers are now back at work.

“When the US infection rate peaks, all will be in place for the economic recovery to start. Financial markets will judge the effectiveness of this plan and, as ever, will turn before the facts change. Maintaining investment discipline based on valuation and reality seems to be the best way through the unprecedented series of events that have come upon us this year.”