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Investing in the era of COVID-19: Finder’s July Investing report 2020
Investment experts weigh in on what the future holds for share trading.
The brutal stock market crash in March and the unexpected rebound has left many of us wondering what’s in store for the equities market. Has the market recovered or is it just a dead cat bounce? To investigate, we polled 32 experts from around the globe.
What’s happening with the stock market during COVID? Finder surveyed 32 investment experts to find out.
Who are our panellists?
|Boitumelo Mofikoe||Pilanehurst Asset Managers||Chief Investment Officer|
|Daniel Deming||KKM Financial, LLC||Managing Director|
|Nikola Gradojevic||University of Guelph||Professor of Finance|
|Jessica Amir||Bell Direct||Market Analyst|
|Sean Gossel||University of Cape Town Graduate School of Business||Associate Professor|
|Sebastien Galy||Nordea AM||Strategist|
|Keith Temperton||Tavira Securities (Leaving in 2 weeks)||Trader|
|Stephen Innes||Axicopr||Chief Global Market Strategist|
|Ipek Ozkardeskaya||Swissquote Bank||Senior Market Analyst|
|Jeffrey Halley||OANDA Asia Pacific Pte||Senior Market Analyst APAC|
|Dr Alexander Tziamalis||Sheffield Hallam University||Senior Lecturer in Economics|
|Joao Rafael Cunha||University of St Andrews||Lecturer (Assistant Professor)|
|Francis Marais||Glacier by Sanlam||Head of Research|
|Michael Gray||Kiwi Investor Blog||Senior Investment Professional|
|Roger Clayton||Salt Funds Management Limited||Chief Operating Officer|
|Mazhar Mohammad||Chartviewindia.in||Founder & Chief Market Strategist|
|Lulama Qongqo||Mergence Investment Managers||Investment Analyst|
|Simon Brown||Just One Lap||Founder|
|Neil George||InvestorPlace||Editor-in-Chief, Profitable Investing|
|Kyle Rodda||IG Australia||Market Analyst|
|Gary Dugan||Purple Asset Management||CEO|
|Nitin Dialdas||Mandarin Capital Limited||Chief Investment Officer|
|Nicholas Ferres||Vantage Point Asset Management||Chief Investment Officer|
|Steven Adang||Anchor Pacific Investment Management Corp.||Chief Investment Officer|
|James Gauthier||Justwealth||Chief Investment Officer|
|Chris Weston||Pepperstone||Head of Research|
|Lee A Smales||University of Western Australia||Professor of Finance|
|Richard Holden||UNSW Business School||Professor of Economics|
|Karl Schmedders||IMD Lausanne||Professor of Finance|
|Adrian Chia||MACS Capital Sdn Bhd||Director|
Equities recovery or central bank bubble?
The majority of panellists (59%) believe equities will recover to levels we saw in early 2020 this year while a further 25% say the market will recover in 2021.
Some panellists, including Daniel Deming, managing director of KKM Financial, were quick to flag the NASDAQ’s spectacular recovery while this survey was in market. However, while he thinks we’re in for a recovery this year, he did note that other indices like the Dow and RUT are still lagging.
Many panellists forecasting a quick recovery, including Gary Duggan, CEO of Purple Asset Management, say the hunt for yield is supporting stock prices.
“The very low yields available from government bonds, which are often below the local inflation rates, are almost forcing investors into the equity asset class,” he said.
Sven Richter, director at Geokalla, also says we’ll see a recovery this year but that some markets will struggle.
“The huge amount of liquidity being put into the system is pushing up equity prices in global markets, emerging markets have lagged and frontier markets are even further behind. But we could also see a downward leg after this as parts of the real economy may continue to be affected by COVID-19 for years,” he said.
Jessica Amir, market analyst at Bell Direct, says the recovery in Australia is thanks to the government and central banks pulling us out of the quicksand.
“…new retail and institutional money is flowing into markets, pushing up equities,” she said.
“Markets are always forward-looking and Aussie investors are focused on the recovery path ahead, with a rise in GPD expected in the second and third quarters of this year. Plus, with the RBA buying bonds, it’s helped the three-year bond yield hit rock bottom. So the hunt for yield is also pushing investors back into the market as well. So the market should continue to rally based on the fundamental and economic recovery factors being priced in.”
Some panellists’ optimistic forecasts are contingent on the management of COVID-19. Joao Rafael Cunha, lecturer and assistant professor at the University of St Andrews, said equities would recover this year assuming there is no second wave.
Stephen Innes, global chief market strategist at Axicopr, put it this way: “there is only one recessionary input that needs reversion and that is COVID-19.”
However, a quarter of panellists don’t think we’ll see a recovery until 2021, with some suggesting a price correction could be in store.
Dr Alexander Tziamalis, senior lecturer in economics at Sheffield Hallam University, says equity valuations have been fuelled primarily by extreme liquidity, not a rational assessment of the economy and the damage it has sustained – a sentiment echoed by fellow panellist Sean Gossel, associate professor at the University of Cape Town Graduate School of Business.
“Equity markets do not yet fully reflect the impact of the COVID-19 lockdown,” says Gossel.
“Many stocks are thus mispriced and still need to correct. In addition, there are ongoing fears of the inevitable second wave of infections as the economies open up once again.”
Meanwhile, Nikola Gradojevic, professor of finance at the University of Guelph says the volatility will continue with the market stabilising only once the health crisis is resolved.
“The problem is that the resolution of the pandemic depends on the behaviour of both the population and the policy-makers. The combined outcome of these two forces is difficult to understand and predict because their underlying drivers might conflict with each other,” he said.
The remaining 15.6% think recovery is going to take longer. 6% say it’ll be 2022 until equities recover, a further 6% think it’ll take as long as 2023 and 3% think it will be 2025-26 before we see things fully rebound.
Roger Clayton, chief operating officer at Salt Funds Management, doesn’t think we’ll see a recovery until 2023 with higher unemployment and lower corporate earnings weighing on the market.
Lulama Qongqo, investment analyst at Mergence Investment Managers, is the only member on the panel who thinks recovery will be delayed until 2025 or 2026, suggesting we’ll have an environment similar or worse to the great depression of 1929 where real returns in the US were -13.1% on average for 5 years thereafter.
“…This time there’s a pandemic, the market was overpriced prior to COVID-19, governments and companies are more indebted vs history. I don’t think that the economic reality is fully priced in yet, nor do I think that it will be as easy as we expect to get out of the economic fix caused by the pandemic,” she said.
Which major index will offer the best returns?
Retail investors who are looking to invest in the short-term need to decide where they put their money. While some retail investors are happy to punt on individual stocks, many prefer to take a passive approach called index investing. So which index should they invest in?
According to the panel, the NASDAQ will have the strongest performance over the next 10 years for an investment of $100 made on July 1. Interestingly, Finder research reveals the NASDAQ had the strongest returns of seven indices after the 2008 market crash. However, it’s important to note that past performance does not equal future returns.
Nicholas Ferres, chief investment officer at Vantage Point Asset Management, is part of the 53% majority who thinks investors should look towards the NASDAQ for their long-term investments.
“NASDAQ over the long term due to superior profits and as the index is a beneficiary of liquidity. However, we also favour MSCI EM or non-US equities on a relative basis. When the Fed last expanded the balance sheet by more than 100% EM equities rallied 170% in absolute terms and outperformed the US. In relative price and valuation terms, EM offers the greatest upside,” he said.
Chris Weston, head of research at Pepperstone, backs up Ferres’s sentiment, adding that the NASDAQ is always a solid choice.
“Always bet on the NAS…this is where global innovation comes, much with monopolistic values and while the companies within the index will evolve, new and exciting businesses will emerge. Europe will benefit from a greater integration from countries and the multiple investors willing to pay will only increase. Europe is only becoming more integrated and less fractured.”
A third of panellists who answered the question suggested the S&P 500 would have solid returns. Richter says he backs the index given “it will benefit from the liquidity injected into markets and it’s where many of the stocks that will benefit from the changes to our economies are listed”.
Two Chinese exchanges, Shanghai and China A50, ranked third and fifth in our panel’s list of suggestions.
Francis Marais, head of research at Glacier, suggests emerging markets, especially India and China would perform well while Ipek Ozkardeskaya, senior market analyst at Swissquote, says China booming on rising focus in high-value-added services and products, renovation and technology should be reflected in asset prices sooner rather than later.
However, some panellists forecasted a shift away from investment in China.
Lee A Smales, professor of finance at the University of Western Australia says that “until recently, I would have suggested Chinese stocks would perform best, but I think we are starting to see a Western pivot away from China. Instead, I think the biggest growth opportunity is in countries like India, where a huge population is still relatively poor.”
Other panellists said markets that had experienced the biggest sell-offs, such as the ASX200 Bovespa, or have the highest forecasted population growth, such as India, are ones to watch.
COVID-19 investing opportunities
Not everyone wants to take a passive approach towards investing, and for those taking an active approach, their investment styles usually fall into one of two categories: growth or value investing. We asked our panellists whether they thought growth or value investors would perform better over the next 18 months.
Which investment styles will see the most success going forward?
Close to half (47%) of the panel said that growth investors would see the most success, while 38% said value investors would perform better and 16% said they were unsure.
Marais is one panellist who said growth investors would perform better in current market conditions.
“Lower interest rates benefit growth investors, while good fundamental economic recoveries are needed for value stocks to outperform growth stocks,” Marais said.
Weston also backed growth investors over the next 18 months.
“There will be rotation within a longer-term bull market, but on the whole, with the Fed likely to expand its balance sheet towards $10.3t (46% of GDP), the ECB doing even more and interest rates more broadly at zero, the limited upside for longer duration bonds and equity risk premium favours growth.”
However, just shy of two-fifths (38%) of the panel say value investors, not growth investors, will have a stronger performance.
Boitumelo Mofikoe, chief investment officer at Pilanehurst Asset Managers says value investors are more resilient.
“Value investors would have favoured quality stocks that are mostly defensive and can weather the storm and emerge victorious post-COVID-19,” Mofikoe said.
Sandip Sabharwal, the owner of asksandipsabharwal.com, also says value investors will come out on top since the growth bubble looks like it’s about to burst.
“Growth stocks are at a huge premium at this point of time which is unsustainable given the growth outlook,” he said.
Adrian Chia, director at MACS Capital, says he’s unsure which style will outperform the other.
“Excess liquidity might fuel more risk-takers and speculation as long as there are no major negative factors undermining the markets,” he commented.
COVID-19-induced recession to increase financial inequality
Recessions like the GFC and now the coronavirus crisis are often touted as once in a decade or even once in a lifetime events. And while the effects of incidents like these are overwhelmingly negative, it does present some with opportunities to buy cheap stocks. While this is great for those with means, others struggling to simply pay the bills may be left behind. 88% of panellists say the coronavirus-induced recession will increase financial inequality as those with means are able to buy assets at a discount.
Is it worth investing in travel?
The battered travel sector is one area investors may look to buy at a discount. With global border closures and mandatory quarantines, the travel industry has inevitably been put on hold amid the coronavirus pandemic. The changes have commentators speculating travel stocks, such as airlines, cruise lines and travel-booking businesses, are cheap and could offer big returns for those willing to buy-in.
So are there travel bargains to be had? According to almost a third (31%) of the panel, yes.
Sabharwal suggested high-quality hotel and luggage stocks could be worth considering. Karl Schmedders, professor of finance at IMD Lausanne, also flagged the potential for some hotel chains to come up on top. He also says “a company such as Carnival may come roaring back.”
Amir also thinks there are opportunities to be had, with the caveat that the industry will likely look much different to pre-COVID-19 times.
“Travel will return but it will look a lot different to how it used to be. Aussie household savings rates doubling this quarter, (according to the ABS) Qantas (QAN) for example, looks set to see a surge in flight amid pent-up demand. Qantas is also playing to return to 40% domestic capacity by the end of July,” she said.
However, half the panel (50%) aren’t positive on travel stocks.
Simon Brown, founder of Just One Lap, thinks there’s too much uncertainty to bag a bargain. “Travel is going to be hit very hard and we have no way of knowing what the industry will look like after the pandemic,” he says.
Qongqo and Richter highlighted how difficult it is to pick a winner. “I think that the travel companies can get cheaper or go bankrupt. It’s hard to predict which cruise liners or airlines can stay liquid longer than the pandemic can wreak havoc,” Qongqo says.
Richter put it this way:
“We do not yet know how long travel will be impacted due to COVID-19 and while there will be bargains, it’s difficult to assess which ones are bargains, which ones will go bankrupt and which ones will be rescued with investors taking the loss,” he said.
Sean Gossel doesn’t expect discounted travel stocks but pointed to another potential opportunity in the industry – virtual travel. “The travel industry as we know it is going through a revolution and will take years to recover. The growth and development of virtual travel possibly presents a good investment opportunity,” he commented.
Jeffrey Halley, senior market analyst at OANDA Asia Pacific Pte suggested any return on travel stocks will be a long waiting game. “Travel will be the very last industry to recover along with airlines.”
The remaining 19% of panellists weren’t sure either way. Clayton and Michael Gray, from the Kiwi Investor blog, say it’s too early to say, with little certainty around when the industry will open back up.
Tips for retail investors
In times of crisis, it’s hard to know which way is up and that is especially true of investing.
What tips did our panel have for retail investors? Well, a lot of our panellists recommend being patient as well as careful and to make sure they diversify. Amir says that the current climate is the right time for people to create a diversified portfolio.
“Investors now have an incredible opportunity to set up a well-diversified portfolio across Aussie and international shares, listed property and fixed interest. And with shares and listed property trading at heavy discounts, there is a lot of growth on the table that will have a HUGE impact on investors’ futures in 3, 5 and 10 years.”
James Gauthier, chief investment officer at Justwealth, suggests that while market fluctuations could see some businesses go under, creating a portfolio that spreads your risk should help you weather the storm.
“Diversify. The future is uncertain and the risks of bankruptcy or loss may be elevated so spreading the risk across companies and sectors can help minimize loss.”
Dugan says that people shouldn’t rush into anything right now.
“Be patient and only buy on a weak phase in the market. Remember, there is a massive structural change underway. Investing with a bias to ESG factors is key.”
This is a sentiment shared by Steven Adang, chief investment officer at Anchor Pacific Investment Management Corp.
“Be patient. Dollar-cost average. Look to non-equities for better risk-reward. Active management will come back but you need to know how to pick the right ones otherwise you’re best left to indexing.”
Weston thinks investors need to manage their expectations, especially those that have seen recent success.
“If you bought in March and made good money, especially if you got into travel stocks and unloved names, understand those runs happen once every decade or more. Become realistic on potential returns, create a framework to better manage portfolio risk, be prepared to cut out of companies that are not performing and use the capital elsewhere. Look at quality, that being, companies with excellent balance sheets, solid cash flow and a product or service which you feel holds a high probability of ever-greater demand.”
Mazhar Mohammad, founder and chief market strategist at Chartviewindia.in, suggests choosing companies that aren’t going to run into cash flow issues.
“One should look at stocks with a good amount of cash in their balance sheet accompanied with low debt. These type of businesses not only withstand the current crisis but should come back faster when the current crisis subsides,” he said.
Tips from our experts
|Daniel Deming||Don’t get sucked into the common themes where debt is still an issue. Strong cash positions, means strong company fundamentals.|
|Nikola Gradojevic||Diversify and be patient. Look for undervalued gems.|
|Jessica Amir||Investors now have an incredible opportunity to set up a well-diversified portfolio across Aussie and international shares, listed property and fixed interest. And with shares and listed property trading at heavy discounts, there is a lot of growth on the table that will have a HUGE impact on investors’ futures in 3, 5 and 10 years.|
|Keith Temperton||Do you own research. Plan your trades and trade your plans!|
|Ipek Ozkardeskaya||Not to sell on temporary panic movements.|
|Jeffrey Halley||Invest for the longer-term, not to “get rich quick”.|
|Sandip Sabharwal||Be ready for huge volatility|
|Francis Marais||Choose a combination of passive and active managers as opposed to trying to pick you own stocks.|
|Michael Gray||Take a longer focus, be price-conscious, and the stronger are likely to get stronger.|
|Mazhar Mohammad||For the next 12 months, in our opinion, one should look at stocks with a good amount of cash in their balance sheet accompanied with low debt. These type of businesses not only withstand the current crisis but should come back faster when the current crisis subsides|
|Lulama Qongqo||The market can stay irrational longer than some companies can remain liquid. Try not to get caught in a speculative bubble by ensuring that you pay close attention to company fundamentals, especially balance sheets. Ask yourself if you would be comfortable owning a certain company/stock if the share price was not displayed every day.|
|Simon Brown||Be careful, very careful|
|Neil George||Do your credit analysis. Look at current ratios and cash burn rates. Then look at debts and the pending maturities as well as the status of creditors and bond investors. Companies need to be of good status now to make it through to better times post SARS-CoV-2.|
|Kyle Rodda||Don’t chase the price. Know what you’re paying for.|
|Gary Dugan||Be patient and only buy on a weak phase in the market. Remember there is a massive structural change underway. Investing with a bias to ESG factors is key.|
|Nitin Dialdas||Given the sharp rebound in the markets over the last couple of months, I would urge caution. At this point, it’s all about stock picking rather than going with the general market.|
|Nicholas Ferres||Focus on the strongest balance sheets (least leverage) and strongest cash flow or companies. Some of the companies will be value traps and should be avoided.|
|Steven Adang||Be patient. Dollar-cost average. Look to non-equities for better risk-reward. Active management will come back but you need to know how to pick the right ones otherwise you’re best left to indexing.|
|James Gauthier||Diversify. The future is uncertain and the risks of bankruptcy or loss may be elevated so spreading the risk across companies and sectors can help minimize loss.|
|Sven Richter||Look for quality and low debt.|
|Chris Weston||If you bought in March and made good money, especially if you got into travel stocks and unloved names, understand those runs happen once every decade or more. Become realistic on potential returns, create a framework to better manage portfolio risk, be prepared to cut out of companies that are not performing and use the capital elsewhere. Look at quality, that being, companies with excellent balance sheets, solid cash flow and a product or service which you feel holds a high probability of ever-greater demand.|
|Lee A Smales||Be careful out there.|
|Karl Schmedders||Despite their high valuations, Alibaba and Amazon will do well long term.|
What will the economic recovery look like?
Given the equities market is influenced by macroeconomic trends, we asked our panellists when they thought the global economy will recover.
The panel dismissed the prospect of an immediate economic recovery, with just 3% forecasting a “V-shaped” return. However, the good news is that the majority of panellists are forecasting a recovery, with just 6% expecting to see an “L-shape”.
The panel thinks the global economic recovery is most likely to take the shape of either a W or a U (75%).
41% of panellists think we’re in store for a W-shaped recovery. When asked why, Sabharwal said there will be “an initial bounce then fall as stimulus impact wanes”.
Keith Temperton, trader at Tavira Securities, also expects peaks and troughs but says that, given the unprecedented times, anyone that claims to know the outcome is “delusional”.
“Central Banks are out of control and my biggest concern is we see a stagflationary outcome,” he said.
More than a third of panellists (34%) say the recovery will be “U-shaped”, including Kyle Rodda, market analyst at IG Australia, who says the recovery will likely be slow and quite uneven.
The remaining 16% say the recovery will take another shape. Editor-in-chief at Profitable Investing at InvestorPlace, Neil George, expects recovery to look like a shallow U, while chief investment officer at Justwealth, James Gauthier, forecasts a check mark or “swoosh pattern”. Meanwhile, chief investment officer at Vantage Point Asset Management, Nicholas Ferres, notes, “the economy might not be a V – but the stock market has already had a V recovery.”
The vast majority of panellists (88%) think a global economic recovery is either somewhat or totally dependent on the development of a COVID-19 vaccine. 16% say it’s totally dependent, while 72% say it’s somewhat dependent.
Chief investment officer at Mandarin Capital Limited, Nitin Dialdas, who says recovery is somewhat dependent on a vaccine, noted some portions of the economy will be more dependent on a vaccine than others.
“Business will be able to be done through video to a certain extent but tourism, travel and hospitality businesses will continue to be hit until a vaccine is found,” he says.
Ozkardeskaya thinks a vaccine will be part of the solution but won’t be a fix-all remedy. She commented, “Global economic recovery will likely remain subdued over the next decade, despite cheap liquidity and favourable credit conditions. The vaccine will likely help improve prospects but cannot do the heavy lifting alone.”
Meanwhile, Clayton noted that while a vaccine will assist in recovery efforts, the reality is there’s a reasonable chance one may never be found.
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