Still nervous? The market fell (panicked), rallied (regained sanity) and then peaked again last week. In response to the latest 'top' we ran our cash up again, to 40%, and ‘hid like chickens’ in bigger market stocks.
We are now redeploying again with cash down to 20% and going lower as we buy 'recovery stocks'. Why? Because we are over the worst...see this from the excellent Financial Times website:
The nervous Nellies will be telling you about how terrible it all is, how the coronavirus continues to hold society in its grip, but the stock market doesn't price stocks on what they are worth today, it prices stocks on what they will be worth in a month, a year or sometimes even further ahead. Investors have to get ahead of the headlines not wallow in them.
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THE NEXT HEADLINES: "ECONOMIC RESTART"
The next headlines are going to be about every economy restarting, lockdowns ending, getting back to work and before long sports, bars and restaurants getting back to business. Next you will find yourself at the airport flying to that international holiday resort for that holiday you deserve (with 23m of your closest mates) and those roving retirees are going to be rushing to book cruises at huge discounts that will not last.
The moment you start allowing groups of 10 the lid is off, you can't police social-distancing and the economy gets going.
Even if it is too early (a "Second Wave" would see the market tank), the immediate stock market theme is going to include the economic restart and it will happen despite a tail of now dated, prudently cautious medical advice and overly-concerned social commentary that will soon sound "so last month".
An example of getting ahead of the headlines - there is horror in the headlines about 4.4m people losing their jobs in the US in a week and 26.5m unemployed in five weeks, but you have to understand that the next headline is going to be 4.4m people getting back to work in a week. (Well...maybe the headline after next).
An Ernst & Young analysis says that if we come out of lockdowns in 1-3 months the economic recovery is V-Shaped. Six months later it is a different matter. For the economic damage to be contained, the economy has to re-open sooner not later. In which case every politician is sitting at home knowing that if they don’t let/get everyone back to work and soon they are never going to get re-elected. No politician wants to be the last President, Prime Minister, Monarch, Premier, Governor, Senator, Congressman, MP or Councillor holding out on their electorate's right to make a living again. At some point political necessity will overwhelm the medical directions. It's already happening.
Hence...an interesting week. Will the market take this message on board and have a rapid sentiment recovery (its seems to be) or will this recent ‘peak’ develop and the negativity take grip once more (looks unlikely). This week may be the turning point. We are in the process of diving back into the market through a list of recovery stocks. The Coronavirus was very swiftly factored into the markets. The recovery will be as well.
There are a host of stocks at the pointy/risky end of the COVID-19 sell-off. Stocks that are still flat on their sentimental backs, trading at prices we will look back on and cringe that we didn’t have the presence of mind to buy at the bottom. It's risky stuff, but we are now putting some of the fund into ‘recovery stocks’. If the market gets the “COVID-19 is over” bit between the teeth these are some of the stocks that will respond, some of the stocks that have been directly hurt by COVID-19.
Let me know any stocks I have missed in the comments below
OTHER RECOVERY PHASE STOCKS
There are plenty of other less risky stocks, I see a Livewire article talking about 5 pandemic-resistant stocks, but maybe you want to buy the stocks that got hurt the most instead, and have the most to gain from it going away. Not the most resistant, but the most affected. Come the resurrection all the stocks that have served you well in the downturn, because of their resistance to the virus, will under-perform those that have done it hard. So here are some stocks you could buy for when the market gets going again after the coronavirus wears off, the more geared plays. Here are a few groups of stocks that have been damaged by COVID-19 and might provide a more geared play to the virus getting behind us, if it does:
- Banks. Finally bottoming after the NAB killed the mood and created the low point with its $3.5bn capital raise and its cut dividend. The sector is now showing signs of bottoming.
- Motor Industry.
- Media (Advertising dropped off a cliff).
The sentiment driven growth stocks in the ALL TECH sector - in hindsight there are always some events that 'mark the top', like three stock brokers listing in 2007 ahead of the GFC. The ETF market is a good counter indicator as well, the moment they create an ETF to address a fad, it'll end. And the day they created the All Technology
Sector the sector disastrously peaked on the cornoavirus. It will resurrect.
- Highly indebted stocks that ran scared of a credit crisis - Infrastructure, Utilities.
- REITs - also upset by the risk of a credit crisis.
- Stock market stocks - Anything geared to the stock market, fund managers, Macquarie, Computershare, HUB, NWL, IRE, PTM, PPT, MFG, ASX.
We are now buying for the recovery on the assumption that in a couple of months COVID-19 will be a passé market theme and we will be looking forward not back. Yes it could be wrong, yes we could come out of lockdowns too early and see a relapse (it would be disastrous for the markets), yes there are some dire economic headlines ahead (but we already know that - its reporting on history) and yes there are some significant company earnings updates ahead of us, none of which will be good. But all these will be marking the bottom, not heralding the future.
They say "Buy the dips". We are in the middle of one. And for those that remain Super-Bearish let me ask you, what terrible development are you imagining that is going to match the full-blown headless panic that created the low on March 23....and before you tell me, let me ask you, is it low odds? If so the market won't believe it until it happens and the odds are, it won't.
TIMINGOne day soon we are going to wake up and find 10% of the All Ords stocks have RSI buy signals (the same way 10% had sell signals a week or two ago) - that will be the sign. It could well be tomorrow.
Behind me on the Sky News, Australian politicians are being openly attacked for being too cautious and killing the economy. The COVID-19 sentiment lows are in. The stock market's sentimental COVID-19 low point is behind us. Stock market sentiment will recover. We all just have to time that and decide where on the risk curve we want to be, and whether we play the recovery through bland safe predictable big boring ‘market’ exposures or aggressive stock selection. We’re doing a bit of both. They say you can't time the market. You have to.
We are discussing timing and stocks on a daily basis in the newsletter.
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Lol! The lockdown was to slow the rate of infection so hospitals would not be overwhelmed. There is no end. Covid is a genie in a bottle at the moment. Talk like this is the cork being popped.
John - the stock market is not emotional - sentiment is improving. Peg yourself in the negativity and you are going to miss the unemotional recovery in the stock market. Yes it might relapse, but lets deal with that when it happens.
Timed it well so far. A lot of mixed opinions about buying the dip or a second re-test of the 4,400 region. It will be an interesting couple of months ahead.
Very Kevin - in the next couple of months we're going to be overwhelmed with either regret or relief that we did or didn't buy the market - this article is about the balance of probability being on relief that we did buy the market. Just have to nail the moment.
A very considered approach Marcus. As always, thanks for sharing your insights!
"It's risky stuff..." I think that is your new catch phrase Marcus, at least for the next few months. A lot to consider, thanks for the charts.
Thanks for the lists really interesting
Another good article Marcus.. those with a glass half full attitude will have bought in on the cheap and already made some good gains, and those with glass half empty attitude may miss the boat altogether.. May/June will be interesting to say the least..
Thank you for those tables. I still think market is trading based on technicals and the risk to the downside is way more than upside. Equity dilutions, debt refinance, revenue loss and capex contractions, just to name a few, have not been fully realized by retail investors. The odd thing would be is to establish a connection between reported profits compared YOY and EPS. A lot of one-offs expenses to justify lofty PE. Having blessed with a relevant science degree as well, with the information I've got, this is not going to disappear like SARS. A bank reported today with 158% more provisioning. Can that be a sign? But then Marcus, people think a hundred times before buying a pair of shoes, but when buying shares in companies, hunch is the word. Its complicated.
The fear and loathing is part and parcel of investing, economies need such medicine from time to time. My view is that the banks are the underlying key to recovery. Thanks for your insight and research.
The sentiment is right but the timing is off (although not necessarily wrong). Be mindful of the "for the want of a nail ..." proverb to the extent that there are always those who want to shortcut when "most" of the hard work has been done. However, the critical aspect remains that it is pointless for Australia to charge off while the rest of the world is still mired in CV19 battles. Small steps Steady steps for the next three weeks.
This is so on point. Thanks for the article and analysis, Marcus. The market is already on recovery and the regret has already started, grrr. The buy in this market would be for the long standing, strong operators' stocks that were slightly shaken in this market. If there is someone here could suggest a good share trading platform to buy in European market, I am thinking Stockholm, that would be great.
Thanks Marcus. Im not sure how this tracks with increased unemployment, debt and lower consumer confidence. I tend to align with Ray Dalio and the long term debt cycle
I think you are right in that people will think it's all over sometime in the next month and stocks will bounce and probably run hard. They will be disappointed when the economic situation doesn't improve and stocks tank again. Agree that the sooner we come out of lockdown the less the economic damage and the faster the recovery. However there is no data to suggest a V shaped recover. China had a one month lockdown and then basically ordered people back to work. Two months later long distance travel by road rail and air is still 55% down and only increasing slowly and subway travel in 9 major cities still 40% and only increasing slowly. There are a whole lot of graphs that tell a similar story here. https://www.capitaleconomics.com/the-economic-effects-of-... As for all sectors recovering within the forseeable future forget it. Overseas students are our third largest export industry - no short term recovery. International travel - no. Anything involving large crowds of people like entertainment - no. New construction and real estate - the slowdown is just starting. Most industries making capital goods or long lasting consumer goods - no. Banking - at some stage the non payment of loans from people without the ability to pay will have to be faced. Any industries that service those sectors - affected.
Yes, we can do it if the COVIDSAFE app is widely adopted then used to get onto a jet, get into a workplace, get into small events, get across state borders, get into hospital. The genie can be squashed with testing everytime it appears.
Global GDP is forecast to fall 5+% as a result of COVID-19, and perhaps more depending on wear you take your counsel, certainly the most since WWII. Global GDP fell 0.5% through the GFC, which routed the worlds share markets for an extended period - as profits didnt meet EPS ratios. Oil is already pricing in a depressed future. I just can't believe commentators like you believe that its just all going to be ok, and we have passed the worst???
Hi Steve Van - I hear you and I'm sure you're right with long term views on sectors BUT its an important general point (unrelated to your specific views) that the stock market is not about being right in the long term. For instance - in the long term the Tech Boom turned into a bust - I had a colleague at Bells in the Tech Boom who knew it was a spoof and he sat, sagely finger-wagging throughout, persuading his clients not to get involved. The one man with the maturity and vision to call it for what it was, a spoof, a moment of headless misplaced optimism. 'This is going to end in tears'. was his catch-cry. And he was right. Meanwhile we made a fortune while he and his clients missed that golden, once in a decade, opportunity to make money. Long term caution is only valuable if your audience only ever buys stocks for the long term (and what investor would faithfully do that these days?). Whilst being cautious about the long term impact of COVID-19 is doubtless right, there is an opportunity to make money now out of a recovery from these sentimental lows, and that's what I have written about. By the time the long term comes right, I and many other investors will have taken twenty different opportunities and forgotten what was said a year ago. The stock market is not about being right in the long term or in the end, its about making money whenever you can on any timeframe that allows.
can you explain the logic of paying out dividends when you need to raise 4 times that amount as capital at the same time at a 10% discount and increasing the total shareholders by 8%.
Thought provoking article. I would suggest there are a few missing elephants in the trading room. - Oz population is now declining: immigration (which accounts for 60% of our pop growth) has been turned off. Our birth rate is 1.7 (per female) vs sustainable level of 2.1. The impact of no immigration is huge on housing construction which is a big driver of the economy (plus other industries). It will be politically unpalatable to turn immigration back on with +10% unemployment rate. - Some of our biggest exports are now dormant: higher education, tourism and immigration (be honest, it is an export) have stopped. Govt will hesitate to reopen boarders to US, China and Europe for some time. Internal tourism will not offset the lost 1.4m annual Chinese tourists. - Convincing people to open their wallet with so much uncertainly is going to be very hard. The service industry is going to struggle for some time. - Debt is brought forward consumption. I suspect Australians are going to have some serious contemplations over how indebted we are personally (highest in the world?). A reversal towards saving will limit local growth. In saying that, I bought consistently in the last week of March and am quite happy. Now waiting for the US markets to appreciate the newly 26 million unemployed. This wont reverse quickly. Buy on that dip.
Good one Marcus. I think some analysts forget that the market tends to look a year or two into the future and act accordingly. It's the shock that causes the reaction. Things become the new norm. But things won't be the same. As always we have to pick the future.
Hi Craig Pickford - Go figure - amazing isn't it. Such is the Australian appetite for dividends that rather than say 'pass' a big bank will ask shareholders for money so they can pay one. Truth is there is only part of the shareholder base that is dependent on dividends and the company is taking from institutions to make sure their income dependent shareholders still get something that persuades them to hold on as shareholders a bit longer. Each bank competes with the other banks for shareholder attention - when NAB was considering whether to pass on the dividend the first question at the board meeting would have been "What do you think the CBA, WBC and ANZ will do" because they can't be the only bank not to pay or their shareholders get sucked away to their competitors, possibly permanently. Bottom line, the dividend decision is not about whether they can afford it, its about not losing shareholders.
Hi Sean Co - "I just can't believe commentators like you believe that its just all going to be OK, and we have passed the worst???" - Did I suggest we were past the worst? Again, its a disagreement about time frame. Adopt a long term time frame and you will be paralysed by uncertainty - same comment as for Steve Van - the article is about an opportunity to profit out of the sentiment improvement that will be (hopefully) brought on by the next set of "Restart" headlines. Lets worry about the "Horror" when it happens, not do nothing because it might happen. You cannot have a long term time frame in the stock market, that's not how it works and if someone suggests to you otherwise you are reading the hopes of an adviser or fund manager that wants to lull you into docility so you don't disturb them whilst they do nothing with your money. The stock market is about activity and opportunity, not long term predictions and inaction.
How do you factor in the damaged consumer sentiment that will see wallets firmly closed, the collapse of international tourism and education, none which is going to change until ?next year. And there is also our record high indebtedness, corporate and private, as well as the oil sector crisis hanging over the global economy. There are surely too many anchors preventing a recovery any time soon.
Vas Vanashree; look at Saxo Bank. It is also available in Australia.
" sentiment is improving " - I agree Marcus. I've felt like a "pig in mud" since ~mid March (i went a LONG a wee bit too early ..from about mid March on & have remained long) however suffered a bit during the post late March dip. - Ouch ! So, so many Companies to choose from (either rightly or wrongly)! Hope all the MT & MTIS Team are well . Regs Jonathan
Thanks Aleksandar Bogdanovic, will do.
I think we have a lot of downside to go. Much of it due to current reality which is not being realised or yet incorporated into company reporting. I also can't see anything like a V or U recovery as I don't think consumers and business will be the same for a long long time. However, Marcus could still be right. Because, if enough people (investors) are wrong, then they will be right. Meaning, if enough investors think the market will recover and go up, then it will.
Hi Brett Davies - All we have to do is be right for a while in this game and change when we're not - everyone seems to want to make unmakeable long term predictions that are valueless to investors. Long term negativity doesn't help if the market is about to pop 10%. We can all worry about the negatives when they appear, until then (at all times) swim with the tide when its running and jump out or swim the other way when you find yourself swimming against it. For now lets play the recovery and worry about the negatives when they arrive, which of course, they might.
Hi Marcus, I admire your generosity in sharing trades and your positive approach to trading. I guess you view the market as a trader and not an investor - so to speak. While I agree with your comments in how the goal is to profit, not to be "right", and that you consider opportunity cost in your strategy (meaning you would rather be able to profit from 6 opportunities that may arise while others wait for the in-theory perfect entry). Yet you would then have to have risk parameters - meaning you would have to have a cut-off for when you mis-time or mis-read the market. As a trader this is less forgiving than as an investor (long term trading). Plus, having this introduces some new psychology into the mix for one. One thing - without the FED, the market would be dead. And with the FED, price discovery may be soon dead. Not sure if that makes your stock picking redundant. The Aussie market is insignificant - the past 5 trading days "we" have been selling into strength - and dragged around by the Dow/SP (or Blackrock or the BoJ). Interesting times ahead.
Thanks for the article Marcus: Looks like poor Suncorp seems to have been missed off your lists! I presume this would have been in with the banks?
Hi John - No, SUN would be in with insurance and I didn't list insurance - not really a recovery sector - 70.2% of their revenue is from insurance - 18% from banking and wealth management