Five Investing Perspectives for the Coronavirus Crisis
The COVID-19 pandemic has prompted a global shutdown that has rattled markets in ways unseen in over a decade. But even amid the extreme uncertainty, equity investors can follow several principles to navigate the challenging and changing times ahead:
1. Think out of the box: Imagine unlikely scenarios and try to connect the dots in ways that may not be immediately obvious. The global financial crisis of 2008 torpedoed numerous tenets of conventional wisdom. Remember, “Housing prices don’t go down”? Or, “Lehman Brothers is too big to fail”? Or, “GM will never be downgraded to below-investment-grade status”? In today’s environment, the unthinkable can become reality. Could all air travel be grounded? Could major cities like New York, London or San Francisco be placed under full lockdown? The answers may be unknowable now, but don’t dismiss the questions just because it’s never happened before. Similarly, don’t rely on past precedent to determine what types of stocks will provide stability in an allocation today.
2. Worry about the short-term path to recovery: Eventually, societies will emerge from this extreme uncertainty and life will settle into a new normal. However, it will probably take a while, and the global economy is likely to experience a deep contraction in the meantime. Stress-testing a company’s ability to weather various scenarios is critical to stock selection. Balance-sheet strength and cash-flow continuity in a severe downturn are two key indicators that can help identify companies that can survive. Some companies may report a big hit on the income statement as the economy contracts, but have strong balance sheets to see them through the trough and will be profitable when the situation normalizes.
3. Don’t lose sight of the long-term horizon: Short-term results are certain to be ugly at most companies, and investors may overreact. That’s to be expected: it’s human nature to focus on immediate stress rather than the horizon. But the valuations of companies that can pull through will depend on their cash flows postcrisis. Investors should try to forecast through the short term to identify equities that have been mis-priced by short-term market jitters. In some cases, crisis conditions create fire-sale prices for high-quality companies with the right stuff to perform well over the long term.
4. Imagine the post-coronavirus world: This isn’t easy to do when countries are still coping with a growing human tragedy and facing massive economic fallout. But investors must think today about what type of trends will reshape the landscape in the future. Some businesses won’t survive the crisis. Other business models will never be the same and may be permanently impaired, such as cruise lines. Companies may rethink business travel, prompting permanent changes in corporate behavior and spending. On the other hand, some companies will emerge as winners. Obvious examples include remote work applications like Zoom Video Communications and Citrix Systems, which are already becoming more routine and will become a more permanent fixture of normal business activity. But other less apparent examples will emerge over time, too. Some companies are well positioned to address entirely new business opportunities—that’s why out-of-the-box thinking is so crucial. What role will Amazon, FedEx and other businesses, like online educators, play in these challenging times, and how may their role in society change in the long term?