Turbulent times

Well the market has certainly woken up to possible risks from the Coronavirus contagion since my last post! We now seem to be in the midst of a full-blown market panic, with the market yoyoing up and down (well mostly down) several percent every day, as investors overreact to news about the virus, its effect on businesses and the government’s response. To top that we now also have to contend with news of a collapse in oil prices, which have fallen almost 30% over the weekend following the break down of OPEC agreements.

All my gains from what had previously been shaping up to be a good year have been eroded and my portfolio is now squarely in the red.

A large number of investors seem to think we are embarking on financial Armageddon. Hopefully they are wrong, though it’s not out of the question. I’m still optimistic, as ever.

The oil price shock has come as Russia has failed to come to agreement with the Saudis on production cuts to prop up prices in response to falling demand. There is a clear strategic motivation behind this – to pull down prices sufficiently to ruin the heavily-indebted US shale industry and reduce long term capacity. For most businesses low oil prices are not a problem, indeed they are a benefit. However, some businesses and countries are heavily reliant on oil revenues and investors are presumably concerned about possible financial contagion from the money they have borrowed. There may also be concern about the impact of a possible collapse in US shale on the wider US economy. I’m not in a position to judge how much of an issue this really is but I’m sufficiently sceptical to remain optimistic that it’s overblown.

Similarly, I can see Coronavirus is likely to spread and may become a serious risk for the elderly and those with weak immune systems. However, I’m sceptical that investors should be so concerned. The health effects on the working population are short-lived and not especially severe. Efforts to contain the virus will have some economic impact, but it seems unlikely that strict containment measures would last for very long or have severe knock-on consequences. Overall, I don’t see why this should significantly affect how much most businesses are worth.

That said, there is uncertainty about what exactly will happen with Coronavirus and this has been sufficient to cause market panic. The collapsing oil price has now added to the sense of impending Armaggedon. Once a panic gets started it tends to feed on itself, as prices become more volatile and long term perspectives get thrown out the window. This can go on for some time until the uncertainty is in some way resolved. If you are going to panic, you need to make sure you do it quickly! Unfortunately, I think I have missed the boat on panicking early with the market now down around 20% from highs. More importantly, I have committed not to concern myself with market timing and need to stick to the plan I have. 

The more practical question I face is in how best to take the opportunities thrown up by more volatile price environment. My normal approach is to only buy high quality and avoids cyclicals. I’m more than happy to stick to this unless the market properly collapses. My approach also generally relies on rotating towards momentum: stocks that are trading strongly and reaching new highs. In a high volatility environment it’s not so clear whether this is still a good idea or not. I’m still minded to generally buy or add to stocks that have held up better and throw out the laggards. However, I’m relatively more interested in monitoring news flow at this point. I’m also looking out for opportunities to buy less liquid stocks that have fallen disproportionately.

I have a couple of trades to update on. I sold Stryker a few weeks ago and replaced it with DotDigital. I had been on the point of selling Stryker for some time as sentiment seemed to have soured after it announced its expensive-looking acquisition of Wright Medical. DotDigital is performing strongly at the moment and I’m becoming more swayed by the long term growth story. I’ve written about DotDigital before, so won’t do so again here.

Last week I sold Beeks Financial after I found its results a bit disappointing. I replaced it with Euronext. Euronext is cheap, trading well and has held up fairly well through the current panic. I’ve also held Euronext before and have written about it fairly recently, so won’t do so again here.

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