My first financial crisis (and pandemic!)
Yes I do sound pretty ecstatic about it because I am. I have never seen stocks at such discounted prices before, only looking back at 2008 levels and going 'wow must be nice back then'. Well, it is now!
Yes of course my portfolio has tanked tremendously in this crisis, but I have also liquidated almost my entire US holdings at the peak prior to this crisis, which offers some consolation. I am definitely going to use this opportunity to catch some falling knives, as I always did, and also here's sharing what I think about the near future.
The markets have crashed hard recently and shares all over the world took a nosedive due to the COVID-19 global pandemic and oil price crash. There’s already a Wikipedia page on it - https://en.wikipedia.org/wiki/2020_stock_market_crash (lol) so yes we know this is for reals.
O&G companies aside - because they are heavily dependent on oil prices - the next biggest factor in the current stock-picking landscape is to choose survivors. There is no point buying stocks at low prices if their businesses have taken a material averse impact which reduces earnings and profits for a long time ahead. We would need to pick stocks that can recover with the economy closely. Barring defaults and bankruptcy, I believe FMCGs, Financial Institutions, and REITs would be reliable sectors to look toward. I would probably discuss the rationale for this in a separate post, but here, I would like to focus on the virus.
Impact of the virus
As of writing, There are 167,515 confirmed cases globally with 6606 deaths. This would translate to approximately a 4% fatality rate. Not extremely terrifying, but also nothing to scoff at. Let's make an extremely basic assumption - the entire world gets infected and 4% of our population is dead. Economic activity should roughly reduce by 4%, so why are the stock markets tanking 30%+? There's no long-run intrinsic reason for it to. This could be attributable to the short-term economic slowdowns we are seeing now, where for example, China's manufacturing PMI got destroyed.
Tourism crashed, people hid at homes, countries went on lock down and trade are drastically impacted. Yes these are bad, very bad. However, this too shall pass.
Estimated time-frame of the virus
Let's take a look at ground zero - China.
Source: WHO
As we can see, the graph looks much like a logistic function (https://en.wikipedia.org/wiki/Logistic_function) whereby the infected increases exponentially till it reaches an inflection point and tapers off. This took approximately 3 months.
While the containment of the virus varies country to country, such as Singapore and Taiwan being able to suppress the spread effectively and lauded for it, on the other hand we have the USA, UK and the EU (Italy?) flopping at it. I believe this is mainly due to freedom being a double-edged sword where the government is unable to effectively control the actions of the people whom undermined the transitivity of the virus a lot. That resulted in uncontrollable spread since most of them believed that this virus only affects Asians.
Worse case scenario, 1 billion people would be infected by May 26, and effectively the entire world's population would be infected by the end of May.
Not so worse case, assuming social distancing and all works, we should be seeing a tapering off similar to China's 3 months.
To be safe, let's give it 2 more months due to the less effective governmental control outside Asia. This would result in approximately 5 months before infections tapers off.
Slightly around then, I would expect economy activity to slowly recover. It would not be instantaneous obviously, because the virus is still around and likely the precautions and restrictions are as well. However, we should be seeing an easing of lock-downs, global mobility, and paranoia.
The market is obviously not blind as well, and at this point I believe the trillions of cash sitting on the sidelines would be starting to pour into the markets, probably starting from the riskier knives-catchers, to value investors, and subsequently institutional funds. I would estimate the entire process to be anywhere from 1 to 4 years (2008 financial crisis), as the bulls are quite prominent.
So we good?
Ultimately, if you do not have a drastic need for liquidity in the next 5 years, I believe it is in our odds to allocate a rather significant portion of our wealth into the markets with this opportunity. Crashes like these which brings many large-cap stocks below their book value is very rare, which happens 1-2 times a decade. Considering the impact of the virus as mentioned above, it would be great to start building a watch list of stocks right now by assessing the going concern and recovery opportunity of companies. Next, prepare entry points by using parameters of one's preference, and you can probably seek to start accumulate positions in about 1-3 months time.
Thanks for reading!