Looking ahead – Opportunities amidst the turmoil

“Price is what you pay. Value is what you get.” – A classic quote from US investor Warren Buffett that could not be more relevant in today’s volatile times. With the upheaval in financial markets, contrarians (investors who purposefully go against prevailing market trends) are finding excellent opportunities to grab bargains in terms of companies with good fundamentals – strong brands, low debt, good management and under normal conditions, stable earnings growth. However, a key prerequisite is patience and this is a difficult virtue to master now as we are overwhelmed by the coronavirus’ negative impact on people, economies and financial markets. Nevertheless, this now could also be an opportune time as an investor to shift focus from short-term and to try looking ahead.

An important message in these tough times is that discipline with one’s investment strategy, being the overall allocation between equities, bonds and other financial instruments that meets the investor’s investment profile, should be maintained for as much as possible. Common to all historical crises is that equity markets have always rebounded strongly, and the expectation is that this will be the case this time too. However, sticking to an investment strategy does not necessarily mean remaining passive – on the contrary. It is expected that the shutdown in the global economy will have an extremely negative effect on the economy for a couple of quarters, and that we will then see a start of recovery in economic activity during the course of H2 2020. However, some companies will probably not survive the COVID-19 crisis or emerge at the other end in an enfeebled state. In contrast, the strongest and most cushioned companies will have the best means for pulling through the crisis and potentially gain ground on their competitors. Hence, there is a need to manage portfolios actively to limit downside and take positions with potential upsides.

While plummeting equity prices have pulled most companies down, it is estimated that current prices now offer attractive opportunities to buy into a number of companies that are generally well equipped, including strong cybersecurity, to survive the economic hard times that lie ahead. Hence, this could be a good point to adjust the composition of equities in a portfolio to obtain a more robust base of quality equities. While it may be difficult to imagine right now, there will be a normal everyday life on the other side of the COVID-19 crisis, where the wheels of industry will turn again and consumers and companies will spend money. It would therefore be better not to focus on price movements today or tomorrow, but look ahead – a year or two from now, and focus on the solid companies that can still be expected to have a strong position at that time. Sectors such as ICT, e-commerce, agriculture and food processing, healthcare and medical supply production are expected to have consolidated their position, and this is valid even for the medium to long term as consumption patterns change.

Furthermore, it is important not only to have the right equities in a portfolio, but also the right share of equities. If there are both equities and bonds in a portfolio, the deep fall in equity prices over the past month has probably shifted the balance, so that equities now account for a lesser share of the portfolio than prior to the COVID-19 crisis – and potentially also a lesser share than the investor would like and that the investment strategy would dictate. In that case, there is a need to rebalance the portfolio (selling off instruments in which the portfolio is overweight so that the desired allocation between the different financial instruments is achieved), otherwise there will have be a lower risk exposure in the portfolio and the investor would enjoy less of the recovery when equity markets turn. However, doing this gradually is preferred, as it is impossible to say precisely when equity markets will bottom out. Going forward, days with significant price rises could very well be followed by further marked price falls. Uncertainty on the future trajectory of the COVID-19 crisis and financial market jitters remains very high.

Nevertheless, looking at the bigger picture, there are attractive investment opportunities right now for long-term investors – and remember, investing should be considered as a marathon, not a sprint. As Warren Buffett also said on the importance of being patient and long-term as an investor: “Someone is sitting in the shade today because someone planted a tree a long time ago”.

Disclaimer: This insight does not constitute investment advice nor should be relied upon to make investment decisions. Please contact our team for tailor-made advice on your portfolio.

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Head – Investment Advisory