Last week was one to remember! After a big fall on Monday led to comparisons with the October 1987 crash, we had another massive fall on Thursday after markets were unimpressed by Trump’s response of restricting flights from Europe. The result is that we’ve now had the fastest ever market crash by some margin – just 20 days to fall 20% from the highs. Exciting stuff, but a little harrowing if you are fully invested as I am.
Hats off to those who managed to sell early or have been holding lots of cash in anticipation. If you had the good judgment or fortune to be in this position then you have a good buying opportunity now. I would probably be starting to buy back now if I had cash to spare. Unfortunately I do not. At some point when the dust has settled I will have to think more carefully about what the warning signs were and whether I could have predicted this better.
If you are fully invested like me then commiserations on the losses you have suffered. It can feel quite overwhelming to think about the magnitude of these losses. Over the last month I am down 20% and have lost the equivalent of several years worth of my post-tax salary. The regret of not having sold to avoid this calamity is enough to make anyone feel a bit depressed, but it’s really a rather negative way of framing things. It’s vital for your ability to make level-headed decisions rather than panicking, and for your mental health, to frame things more objectively and positively. Some perspectives I think are more healthy:
- Look at performance over a longer time frame. As rapid as this drop has been, it has only taken me back to where I was about a year ago. Hardly a catastrophe. If you choose to accept that occasional crashes are too difficult to predict, they are a small price to pay for the consistent returns you get most of the time. Take a look at the zoomed out long term chart of the Dow below. Crashes which seemed cataclysmic at the time, like October 1987, are a small blip in hindsight.
- Instead of looking at your absolute performance, compare it to the stock market. If, like many investors, your focus is on trying to pick the stocks you think may outperform, then this makes more sense anyway. All you need is faith that the stock market as a whole will continue to create value, as it always has done in the past. On a relative basis, despite being 20% down, the last month has been one of my best months ever – I’ve actually outperformed the FTSE by about 8%. Hoorah!
- Look forwards rather than backwards. A market crash throws up lots of excellent opportunities to pick up bargains. Even if you are fully invested already, there is a lot up for grabs from reallocating your portfolio to the best opportunities.
Thursday felt a bit like capitulation, with exceptionally heavy and indiscriminate panic-selling across the whole market. It is possible that Thursday marked the bottom but it seems more likely that we get another leg down at the moment. It’s impossible to know for sure – a lot depends on how the Coronavirus plays out.
There is still a huge degree of uncertainty about what the economic effects of the Coronavirus will be. I came across the following paper by McKinsey on the effects of the virus. I think the estimated impacts on GDP are a bit meaningless, but it provides a useful framework for thinking about the effects.
I’m still optimistic. A temporary shock to earnings has limited impact on long term value. The more important question is how long term profits will be affected eg will the knock on effects of a shock to earnings this year also mean that earnings in three years time are significantly affected? This is hard to judge at the moment. It certainly looks like certain sectors, eg travel and oil, are going to go through a lot of pain this year. This could have knock-on effects. The direct impact of containment measures should be of limited duration and I would have thought the recovery would be sharp, but perhaps economic activity is going to be subdued for some time afterwards? The other thing to bear in mind is that, with very little inflation, there is also scope for aggressively expansionary government intervention to offset any negative economic impact. There seems to be plenty of appetite too. Interest rates have been dropped to rock bottom and packages of fiscal stimulus and emergency credit to small businesses have been announced by several countries.
In the short term there are other considerations. I’m not going to be attempting market timing at this point, but it’s still worth thinking carefully about where my portfolio is invested in light of the current risks and opportunities. Earnings for many companies this year will be disrupted and we are likely to see lots of profit warnings. While these businesses likely have more pain to come, others are likely to be relatively unaffected but have been sold off indiscriminately. I don’t think these differences are likely to have been properly priced in yet, so there seems to be an opportunity to rotate towards companies with greater Coronavirus immunity. To make sure I best take advantage I’ve decided to stress-test my portfolio.
- Mastercard: Mastercard seems likely to be very resilient to the impacts of the Coronavirus, though it will be affected in the short term by the impact on international travel and e-commerce. It has been giving updates on the impact of the Coronavirus on its business. Cross-border volumes are below expectations but it seems unlikely that the impact on overall earnings even in this year will be that severe. The long term growth story is pretty much bulletproof. With the share price down about 20% from highs and the valuation already looking cheap for such a high quality business, I’m relaxed about continuing to hold.
- Games Workshop: I’m a bit less relaxed about Games Workshop. The long term story should not be affected and the business is in an excellent state financially. However, there a couple of aspects of Games Workshop’s business concern me over the shorter term. One is that a significant part of the business revolves around having customers visit its shops to interact with staff and each other. This is likely to be affected by Coronavirus, but it’s not clear how significant this will be for the business as a whole. The other thing is the degree of operational gearing in the business, which amplifies any effect of a fall in sales on earnings. The share price is 25% off its highs. I still like Games Workshop overall but it maybe shouldn’t be one of my biggest positions. I’ve already been taking some profits from my position here and may take a bit more.
- Bioventix: I don’t think it’s very likely that Bioventix’s business will be affected at all. It gets paid in ongoing royalties for antibodies it has developed for tests in the past. Demand for these tests is likely to be highly defensive. The share price has been hit relatively less hard than others, though is still down about 17% from highs. It seems like a good opportunity to buy here.
- Adobe: Adobe released results on Friday that provided some reassurance that the impact of Coronavirus on its business would be limited, thanks to its recurring revenue subscription business model. The share price is now only 13% off highs after a huge bounce on Friday. I’m very relaxed about continuing to hold.
- Boohoo: demand for fast fashion will suffer if people are going out less but this should be a temporary effect. Containment may also reinforce the trend for customers to favour online over bricks and mortar, which should be good for Boohoo. I doubt Boohoo will be too badly affected short term and I’m very bullish on the long term story. With the share price off 26% and the valuation looking enticing I’m more inclined to buy than sell at this point.
- Tristel: as a supplier of medical disinfectant, Tristel is in the fairly unique position of being a possible beneficiary of the virus. The share price continues to make new highs and I’m happy to keep holding.
- Atoss Software: as an IT business with a recurring revenue subscription model, I’m relaxed about the possible impact of the virus on Atoss. The share price is off around 30% from the highs and the valuation, which had been starting to look a little rich, is now looking a lot more reasonable.
- SDI: it’s quite hard for me to figure out SDI’s exposure to the Coronavirus. Demand should be quite defensive so I think issues would be most likely due to supply chain disruption in China or elsewhere. I don’t see there being major risk. The share price has fallen by almost 40% which definitely seems excessive and quite likely driven by low liquidity. One to add to.
- Best of the Best: the online entertainment sector is probably one of the best places to be at the moment and is unlikely to be negatively affected by Coronavirus. There may even be a benefit if people are trapped at home with other sports shut down. The share price has held up pretty well and I’ve noticed a few people talking about it recently. I’m relaxed about holding.
- Esker: as another recurring revenue IT business, I’m relaxed about Esker. The share price is down about 22% and the valuation looks more attractive than it was before. I’m happy to hold.
- Liontrust Asset Management: redemptions and returns correlated to the wider market coupled with performance fees and operating leverage mean that asset managers can get hit disproportionately by the market cycle. On the other hand, Liontrust seemed to be both lowly valued and on quite a roll before it fell 30% in response to Coronavirus. The effect of Coronavirus on Liontrust could be fairly severe but it will almost certainly be short-lived. I think it makes sense to be patient and hold on to this one.
- Churchill China: Churchill supplies tableware to the hospitality sector. It seems reasonably likely that demand from this sector would be hit disproportionately by the Coronavirus. There’s quite a lot of operational gearing at Churchill so profits could get hit hard. The share price is about 25% off highs and the valuation seems reasonable but I think the risk reward may be better elsewhere so I’m minded to replace this one.
- Monster Beverage: I think demand for energy drinks should be fairly defensive and not affected by people not going out in the same way as alcoholic drinks. I’m relaxed about continuing to hold and the share price has held up relatively well.
- Gamma Communications: demand for Gamma’s services is recurring and should be defensive so it’s hard to see it being affected much by Coronavirus. The price is about 20% off its highs (but some of this was pre-virus). This seems like a good one to buy more of.
- Euronext: I find it quite hard to assess how a financial exchange business is affected by something like Coronavirus. Different parts of the business go in different directions eg higher trading volumes and volatility should be good for business but fewer listings would be bad. Data services should be relatively unaffected. Overall I don’t see why it should be too badly affected and the valuation already seems quite cheap. The share price has held up fairly well at around 17% down and I’m relaxed about continuing to hold.
- Lululemon: I think fashion retail is a sector that could get seriously thumped by the containment measures in the short term. The price is down almost 30% and notably didn’t bounce as much as my other US investments on Friday. I’m going to ditch this one.
- Ansys: as another very high quality IT business with recurring revenues, I’m relaxed about Ansys. The price has held up relatively well after a big bounce on Friday.
- Fabasoft: another high quality IT business I’m fairly relaxed about. The share price has been hit fairly hard, 30% down, and it seems like a decent opportunity to add here.
- Arcontech: ditto – it’s hard to see Arcontech being affected much. Nevertheless the share price has been savaged by almost 40%, presumably partly due to the illiquidity of the shares. I’m happy to hold and this seems like a good opportunity to add more.
- Tracsis: ditto – while Tracsis does serve the transport sector which is likely to be afflicted relatively badly, I think most of the demand for Tracsis services should be defensive and recurring. The shares have held up relatively well (though are still 20% down) and I’m happy to hold on to them.
- DotDigital: ditto – I’m very bullish on DotDigital in general and it’s trading very well. I think DotDigital’s revenues should be fairly defensive as email marketing is relatively low cost. The price is only off 20% and the shares are quite illiquid so this seems like a good opportunity to add.
- JD Sports: even though its recent trading has been going very well, I think there is a risk JD Sports could get hit pretty hard this year, being retail-focused with heavy operational gearing. The share price has already been hit hard (over 40% down) and the price seems quite cheap, but I’m still uncomfortable about the risk. I already sold most of my position near the beginning of the crash as it was a bit too big for comfort and think it makes sense to ditch the remainder for something else.
- Salesforce: I’m not too worried about the Coronavirus impact but Salesforce was already near the chopping block as I was a bit underwhelmed by its last results. I’m not in a rush to sell but will probably do so soon.
- Accenture: Accenture has a lot of recurring business and is stable, profitable and well-diversified. I think it’s a relatively safe option to hold onto.
- IG Group: IG is a recent addition and one of the reasons I bought it was that I believed it would be resilient to the current market conditions. The valuation seems reasonable and I have no plans to sell.
That leaves me with a few trades to make. I plan to trim Games Workshop and replace Lululemon, Churchill China and JD Sports as soon as I get the chance.