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Our current thinking on the ‘Corona Crash’

This week’s stock market sell-off has been indiscriminate and, with a few rare exceptions, has materially affected the share prices of all companies, large and small.

The Financial Times has highlighted how the S&P500 index, dominated by some fantastic cash rich companies, experienced its quickest fall into a bear market on record, taking just 16 sessions. While the coronavirus, oil price and recessionary fears were the catalyst for the sell-off, the speed and severity of the fall was primarily due to the proliferation of automated computer trading systems which now dominate the trading of large company shares around the world.

In this regard it is noticeable that, at the time of writing, the FTSE AIM index has fallen 23% year to date which is marginally better than the 29% fall experienced by the FTSE All share and broadly in-line with the 22% fall of the S&P500 index respectively. Where smaller less-liquid companies generally bear the brunt of any market sell-off, this is a surprising outcome and very different to what we experienced during the Financial Crisis of 2008-9. It could also reflect the prevalence of many investors in AIM holding shares for Inheritance Tax planning purposes, who are obliged to display more patience.

The impact of the coronavirus is clearly going to be more meaningful for world economies than originally anticipated. Certain sectors are going to experience a challenging period over the next few months as expensive assets remain under-utilised and staff need paying.

Thankfully, Fundamental portfolios have no exposure to oil and gas and resources companies, where even the blue chip names have seen their share prices fall significantly more than the overall market. Shares in Royal Dutch Shell are currently down 41% year to date pushing the forecast yield to 12%, if those forecasts are to be believed!

With recessionary fears now uppermost in the minds of many we are adopting a cautious stance to bargain hunting on the stock market. While some shares appear oversold, this is often for good reason given the questionable short-term outlook and need to support a hefty debt load and interest bill.

We are long-term investors (not short-term traders) and remain focused on investing in businesses whose balance sheets and cash flows offer the desired support in the short term and where there is no immediate risk of debt and interest burdens causing financial distress.

Many of our portfolio companies have the comfort of being in a strong net cash position, whose cash flows are reasonably predictable and continue to support meaningful dividend payments. From our perspective any bargains will therefore need to meet the key criteria of a strong balance sheet and reliable cash flow.

There is no modern precedent for the ‘Corona Crash’ which has the potential to materially disrupt our way of life over what will hopefully be a relatively short period. As the virus spreads, nobody is sure of how or when it will end. Markets dislike uncertainty and therefore the current volatility could continue for some time yet.

We remain confident in the long-term prospects of our investee companies and the markets will inevitably rebound. As we have communicated previously, at some point this can create opportunities to buy companies at irrationally low prices.

As the end of the tax year approaches please don’t forget to use your ISA allowance. There is no requirement to invest cash immediately, which can simply be held on the account to invest at a later time.

If you would like to discuss potential opportunities please email or call Chris or Stephen on 01923 713890.


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Opportunity Knocks!

Saudi Arabia’s move to swamp the world with cheap oil has sent oil prices down as much as 30%, with global equities also crashing.

As the stock market mayhem ensues, the 10-year US Treasury yield has fallen to a record low of 0.32%, ironically only adding to the appeal of good quality companies with robust balance sheets. Who in their right mind would want to lend to the US government for a meagre 0.32%!

Excellent companies, with no direct connection to the oil price, briefly saw their share prices experience significant falls. Experian (LON:EXPN), a provider of data and analytics solutions, saw its share price fall 30%, before recovering to settle down 6%. This sort of irrational behaviour is manna from heaven for long-term investors like us.

Oil and gas companies and anything related have experienced greatest weakness, with the share prices of Royal Dutch Shell (LON:RDSA) and BP (LON:BP.) down more than 25% at one point. Thankfully we don’t invest in these relics of a bygone era!

IG Group (LON:IGG), the online trading platform for equities and derivative instruments, which should be doing nicely from all the increased volatility, experienced system difficulties in the mayhem, which won’t have gone down well with clients seeking to trade the volatility.

A lower oil price will be helpful to the beleaguered airline groups, who are experiencing a sharp drop in passenger numbers because of the coronavirus, and its noticeable that shares in Easyjet (LON:EZJ) and Dart Group (LON:DTG) only suffered modest share price falls as the oil price sank.

With plenty of other priorities in the short term, notably a well-funded response to the coronavirus, in the current circumstances we fail to see how the new Chancellor can put forward a responsible Budget later this week.

As the stock market rollercoaster continues excellent buying opportunities will appear for those with available cash and who haven’t used their annual ISA allowance. Our model and bespoke portfolio services are well-positioned to benefit from this.