Investor Insights

Indicators worldwide continue to reflect the damaging effects of the coronavirus pandemic and associated restrictions on economic activity and business profits. Yet puzzlingly equity markets have continued to rise. This suggests that the equity market does not seem to care about earnings – yet. History shows that in the long run earnings will still matter.

The massive dislocations caused by the coronavirus pandemic are having only a temporary impact on stock markets, which are pricing in a V-shaped income, earnings and economic recovery. But is this optimism warranted? Or will we continue to see businesses negatively impacted for some time to come?

In just a few short months, the COVID-19 pandemic and associated lockdown have triggered seismic shifts across the retail landscape. Some changes are likely to be temporary; others may accelerate previous structural trends.  As we emerge from hibernation, I thought I’d try to identify the businesses that should prove to be better investments in the years ahead.

First, it was Warren Buffett not buying stocks and, indeed, liquidating large portions of his portfolio to build cash. Then, last week, we had Stanley Druckenmiller tell The Economic Club of New York that “the risk-reward for equity is maybe as bad as I’ve seen it in my career.

The COVID-19 crisis – with the accompanying lockdown – has had a severe impact on many real estate investment trusts (REITs), particularly those exposed to discretionary retailing. The question is: have plummeting share prices opened up investment opportunities, or is there more pain to come?

During the depths of the market’s reaction to the Coronavirus outbreak I listened in on company and journalist conference calls and held multiple webinars and Microsoft Teams sessions with clients, planners and brokers.  Quite often I heard comments along the lines of, “this will change the way we live, work and travel forever”.

After 30 years of investing, I’ve learned that three or four times each decade a market reaches a historic level, either high or low, that investors shouldn’t ignore. Right now, the most obvious opportunity is the historically low oil price. Investors seeking to profit from an oil price recovery have several avenues to consider.

Among the more obvious victims of the COVID-19 pandemic have been the world’s airlines. In Australia, Virgin Airlines in April became one of the first large businesses to enter administration, and Qantas (ASX:QAN) has scaled back its operations to a tiny fraction of normal capacity and loses money every week while this continues.

At the weekend Warren Buffett led the annual shareholder meeting for Berkshire Hathaway, the company that he has led for more than half a century, in front of an unpacked stadium and without his business partner and vice chairman, Charlie Munger, at his side. That is not all that was different about this year’s event.

After a few tough months, Australia is starting to come out of hibernation, and investors are looking ahead – as reflected in our rebounding sharemarket. But they’ll need to be selective in their stock selections, because some businesses will do far better than others in our post-lockdown world.

Much has been written about the unprecedented size and scale of the actions taken by the U. S. Federal Reserve Bank in recent weeks to support the U. S. economy and markets. Starting with cutting interest rates by 150 basis points to 0 per cent, promising to purchase an “unlimited” amount of U. S.

Whether you’re currently on the bear case or the bull case for global and Australian equities, we think investors need to be using this once-in-a-decade sell off to reset portfolios towards quality businesses, like some of the ones we discuss below. Exclusive Content This is exclusive content to subscribers on rogermontgomery. com.