Five-Point Reference Guide For Investors To Wade Through COVID-19 Recession

Thursday, 15 October 2020, 5:12 pm
Press Release: Kalkine

Summary

• Legendary investors like Mr Warren Buffett considers market slump as a once-in-a-lifetime opportunity to tap high-grade firms at reasonable prices.
• Investors can exercise the idea of extremes while investing in the equity market to survive through the coronavirus-induced recession.
• Amidst existing uncertainty, investors can also opt for thematic investment to diversify their stock portfolio while incorporating the coronavirus-driven structural shifts.
• Market participants can further consider replicating the ideologies of renowned investors while making stock selections to minimise the error rate associated with the choice.
• One may cautiously park chunk of funds in precious metals space to build a robust recession-proof portfolio, apart from holding the commodity in physical form and ETFs.
• Value investors may seek exposure to stocks from battered sectors that may withhold some sort of resilience, reviving strongly once economic normalcy pitches in.

With COVID-19 pushing the Kiwi Land into its worst recession in decades, investors remain jittery over the potential impact of this large-scale economic downturn on the equity market. Amidst this mounting uncertainty, it seems imperative for NZ investors to look at a reference guide in a bid to earn decent returns.

While the NZ benchmark index, S&P/NZX 50 has bounced back sharply from March 2020 dip (44% return as on 09 October 2020), several stocks of high-grade entities are still trading at discounted prices. This seems to be offering a golden opportunity for investors to strengthen their portfolio with stocks of fundamentally sound businesses and potentially build wealth in the equity market.

Though recession-induced fears are justifiable, one can recall that legendary investors like Mr Warren Buffett considers market slump as a once-in-a-lifetime opportunity to tap high-grade firms at reasonable prices. It’s all about whether you intend to rely on the prudent ‘Tap-the-dip’ investment strategy or prefer to ‘Quarantine your Money’.

Below is the quick reference guide for investors to invest wisely in equities during the recession:

Exercise the Idea of Extremes

Investors can exercise the idea of extremes while investing in the equity market to wade through COVID-19-driven recession. It involves beefing up the portfolio with the stocks of industry leaders from outperforming sectors, coupled with strong businesses in underperforming sectors to thrive through extreme market conditions.

During the recession, money tends to flow towards leading companies of outshining sectors that hold considerable potential to run better even after the downturn period ends. On the other hand, solid businesses in low-performing sectors can aid investors to ace the crisis even if the tables turn against the outpacing sectors.

While it appears paradoxical, a fusion of such stocks can support investors to survive the test of varied market conditions. While evading herd mentality and creating an emergency fund for rainy days is equally important.

Ponder on Thematic Investing

Amidst existing uncertainty, investors can opt for thematic investment to diversify their stock portfolio while incorporating the coronavirus-driven structural shifts. Thematic investing is delineated as a top-down investment strategy that utilises major macroeconomic trends to evaluate investment opportunities.

With COVID-19 triggering the work-from-home trend at a broader level, investors can take exposure to stocks of companies offering tech services and infrastructure that can assist employees to work remotely. Besides, healthcare, disruptive trend-based businesses and online retail players are also emerging as promising investment avenues.

Investors can ponder on thematic investment strategy to adapt to the latest trends while sailing through environmental, geographical, political or technological advancements.

Explore the Art of Cloning

The idea of cloning investments is uncomplicated. Investors can replicate the concepts of renowned investors while making stock selections to minimise the error rate associated with the choice. The Oracle of Omaha, Mr Warren Buffet,

also charted the ideas of the great investor, Mr Benjamin Graham to create his initial investing framework. Moreover, prominent investors like Mr Charlie Munger and Mr Mohnish Pabrai have also reaped the rewards of cloning investment for investing success.

While imitating strategies of peers in investment space seems effortless, blind cloning can land investors in trouble. The idea is to discern the decisions of leading investors, conduct further research and invest in businesses you really understand and that fall in your circle of competence.

Most importantly, investors need to be cautious of giving up their years of investing principles in panic or revising their investment strategy in haste while opting for cloning approach.

Evaluate Opportunities in Precious Metals

While the year 2020 has been an atrocious one for major economies amid soaring unemployment levels and crushed incomes, it has been ruling in favour of precious metals amidst investors flee towards safe havens. For instance, going from strength to strength, gold has proven to be one of the best-performing commodities in 2020, with gold spot prices advancing by ~25 per cent since January.

Surging coronavirus cases, global economic concerns, and escalating US-China rift seem to be endorsing a flight to safety on gold. With gold holding its glittery shine, one may cautiously park chunk of funds in lucrative gold stocks to build a robust recession-proof portfolio, apart from holding the commodity in physical form. Besides, gold back ETFs also constitute a promising investment avenue.

Despite the promising momentum, one needs to cautiously evaluate and assess gold stocks as per their risk profile and return expectations while undertaking prudent analysis to make a sensible investment decision.

Remember, Value Investing Approach May Still Work!

While the value investing approach has gone through a rough patch over the last few years, the contrarian ‘buy-low sell-high’ ideology retains the significant potential to outperform growth strategy during a market downturn. In fact, COVID-19 appears to be unfurling as a unique opportunity for bargain hunters to tap high-grade businesses at discounted valuations.

Value investors may seek exposure to stocks from battered sectors like retail, airline and tourism, that may withhold some sort of resilience, reviving strongly once economic normalcy pitches in. However, gauging a firm’s intrinsic value through proper fundamental and technical analyses seems instrumental in discovering a true value opportunity.

Moreover, seeking well-managed players while steering clear of value traps and hunting for margin of safety appears crucial to leverage the benefit of this ‘buy-low sell-high’ ideology.

All in all, investors can stay abreast with changing market conditions while keeping a bird’s eye view to map out the future course of action for reasonable equity market gains over the mid-to-long term.

Interesting Read:

Five-Point Action Plan to Survive COVID-19 Storm

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