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Five investment tips for the corona crisis
"The COVID-19 pandemic has created a global freeze of shock that has rocked markets in ways we have not seen in over a decade. But even amid extreme uncertainty, equity investors can follow several principles to keep themselves in the Finding your way through the challenging times ahead:
1. Think outside the box: Imagine unlikely scenarios and try to come up with an overall picture that may not be immediately obvious. The global financial crisis of 2008 mercilessly cleared away numerous investment mantras. Do you remember? “Real estate prices are not going down.” Or: “Lehman Brothers is too big to fail.” Or: “General Motors will never be downgraded to scrap bond level.” In this day and age, the unthinkable can become a reality. Could all air traffic stay on the ground? Could big cities like New York, London or San Francisco be completely sealed off? None of this may have happened before, but the questions need to be asked now. Also, don't rely on past precedent to determine what types of stocks will provide stability in this uncertain environment.
2. Analyze short-term recovery scenarios:Ultimately, societies will come out of this extreme uncertainty and life will settle into a new normal. It will likely take a while, however, and the global economy is likely to go through a significant recession in the meantime. A company's ability to weather various scenarios is critical to stock selection. Balance sheet strength and cash flow constancy in a severe downturn are two key indicators for identifying viable companies. Some companies will report significant drops in profit and loss, but they have robust balance sheets to bottom out and will be profitable if the situation normalizes.
3. Don't lose sight of the long-term horizon: Short-term results are sure to be poor for most companies and investors may overreact. After all, it is human nature to focus on the immediate stress rather than the horizon. But the ratings of the companies that can make it will depend on their post-crisis cash flows. Investors should seek short-term projections to identify stocks that are undervalued due to short-lived market dislocations. In some cases, the crisis conditions create real bargain prices for quality companies with high long-term earnings potential.
4. Imagine the world after the coronavirus: That is not easy when countries are still grappling with growing human tragedy and massive economic repercussions. But investors need to think today about the types of trends that will reshape capital markets in the future. Some companies will not survive the crisis. Other business models such as cruise lines can be permanently impaired. Companies may rethink business travel, which can lead to permanent changes in corporate behavior and spending. On the other hand, some companies will emerge as winners. Obvious examples include remote work applications such as zoom video communications and Citrix systems, which are already becoming more and more routine and an integral part of normal business operations. But other, less obvious examples will emerge over time. Some companies are well positioned to develop entirely new business opportunities - this is why thinking outside the box is so crucial. What role will Amazon, FedEx and other companies such as online education play in these troubled times, and how can their roles in society change over the long term?
5. Realistically assess our knowledge gap: Just as in the global financial crisis, governments are likely to pursue policies that seem unimaginable and, in many cases, capricious. Investors should be aware that there is a lot that we simply don't know yet. A decision based on what policy makers or others can do is not an investment but a gamble. Try to block out the noise emanating from popular financial and social media. Instead, focus on understandable stock basics like business economics, business models, and cash flows.
In a global emergency, it is difficult to gain perspective. It is hard to ignore the endless stream of dramatic news, especially when the markets appear to be going crazy. But sometimes it's important to disconnect from the internet, take a deep breath, and try to rise above the immediate chaos to envision the day after.
The coronavirus health crisis is an unprecedented shock to modern society and the global economy. We are all experiencing a historical fault that has touched everyone's life and has unbalanced markets around the world. But investors can regain their foothold if they adhere to several strategic guidelines at a time of extreme uncertainty. Creative thinking, a sober assessment of short-term challenges, and a focus on long-term business fundamentals and assessments are keys to identifying quality companies ready to weather the pandemic and thrive in the new post-crisis reality. "
Kent Hargis is Co-Chief Investment Officer for Strategic Core Equities at AllianceBernstein (AB).
Sammy Suzuki is Co-Chief Investment Officer for Strategic Core Equities at AllianceBernstein (AB).
Chris Marx is Senior Investment Strategist for Equities at AllianceBernstein (AB).
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