From the carnage of the previous two weeks, this week has seen the US market (as one example) rise by 17% (early Friday). The last blog was titled ‘Darkest Before The Dawn’ and was written right at the point of maximum market capitulation and price declines. We felt the selling was panic driven and hugely amplified by the unwinding of leveraged positions, therefore inevitably undershooting fair values by a distance. This last week’s huge rebound is the reaction to a certain extent of that being the case.
We don’t think we’ve seen the end of the price volatility.
We are not saying that to be depressing. We say that because markets’ historical reactions to major shocks is they almost always form the broad shape of a W.
They shoot downwards on excess pessimism (emotion), rebound on optimism (emotion), fall back to an extent on considered concerns of unknowns, rebound ongoing from considered analysis of knowns and resultant projections.
With this as our guide, I’ll now list some thoughts (mostly from other far more intelligent people) as to the likely winners and losers over time, and the potentially contra-intuitive best investments.
1) The investments that have held up best and pretty much flat year to date, are Global Sovereign Bonds (we hold the Vanguard Fund, which is Government debt). Why? Because it’s a much safer place to put money in a panic. Longer term, it’s unattractive as yields are pretty much zero.
2) The industries hardest hit by share declines are still Airlines, Hotels, Autos, Real Estate, Energy, Financials (Banks). These are the investments that have bounced up the most this week, so contra-intuitively the best investments over that time frame.
Longer term, Real Estate with a yield now on the ishares Global Real Estate Company Fund (REET.NYSE) of circa 7.5% pa looks interesting. It is up this week, but still down around 30% in 2020 (we don’t currently have this in the portfolio).
Energy; so many unknowns, don’t think dividends will stay near current payment levels for most.
Airlines; only investable as of now if you are super brave. Some could well fail.
Hotels; as per Airlines
Autos; tough conditions before, worse now. Most facing huge costs to switch to electric and cash being depleted.
Banks; how do they operate in a zero interest rate economy and what does that mean for their profits going forward?
Bankruptcy of companies from this so bad loans?
3) Industries which have done reasonably well over the last four weeks: (Amazon as an example is UP around 5% year to date)
Anything internet based, healthcare, consumer staples (Proctor and Gamble, Johnson and Johnson as examples), supermarkets.
The interesting question investment managers will need to answer as they allocate to new investment positions, is the relative performance likely from the sectors worst affected (those down the most) and the areas that will plainly benefit such as anything Internet-based.
We’ll keep you updated on thoughts and views.
Before I sign off, a quick thanks to George and Nic who have both been absolute stars. They are very good people.
Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.