How to Play the COVID-19 Short-Term Game; Aside from stereotypical pharmaceuticals
The Issue.
The COVID-19 scare has hit an all-time high, with the US imposing travel sanctions on Europe on top of China and Korea. The economic fears have caused global indices to drop, as well as panic-selling on the markets. To make matters worse, Russia and Saudi Arabia failed to reach a deal right as COVID hit it's exponential point, sending oil prices plummeting as Russia declares it will pump out oil with no restrictions. These two events worked hand in hand to push the global economy past its support levels, putting in motion the shift to risk-free assets such as Gold and the Japanese Yen, and causing equity indices around the world to enter the bear-region.
Figure 1. Gold (yellow) vs. S&P (Blue) Divergence
As evident in figure 1. above, the trends between the S&P and Gold are largely similar, in that an uptrend in gold is usually accompanied by an uptrend in the markets, albeit the strength of the moves might be different. However, in recent months, there is a clear divergence in the prices with Gold prices spiking and the S&P crashing. While "acts of god" cannot be planned nor accounted for, our reaction to these phenomenons can be adjusted accordingly. Because there is no clear outlook with regards to how long the virus will run rampant, we cannot effectively ascertain the duration of the panic selling.
The Move.
While many of you will be tempted to short every single stock in the exchange for the chance at a small profit, I believe it is a dangerous one, as there exists no real indicator for how long the selling will continue. To quote the oracle of Omaha, "Be fearful when others are greedy, and be greedy when others are fearful". This leaves us with the question: how do we play this? In this case, the only move would be to hold cash reserves while letting the market sell off, and begin to average into stocks that do not have their bottom line affected by either the OPEC war or the COVID-19 crisis.
The big talk in the markets nowadays are pharmaceutical stocks, as they are directly related to the COVID crisis. However, take a look at the longer term horizon - two, three years in the future. Does anybody remember SARS, or MERS? These coronavirus strands caused world pandemics, and yet nobody remembers their effects; especially not pharmaceutical companies. Furthermore, in a declared global pandemic, corporations would be dissuaded from profit-hoarding, this meaning the one who discovers the cure would not have much to profit.
Instead, by buying into companies that have a strong, unaffected bottom-line, investors can now own shares in solid businesses at an extreme bargain. In fact, I am pretty sure we will come out of this crisis with Buffet's Berkshire Hathaway announcing a huge acquisition thanks to the crashing prices.
Figure 2. FB Stock Price
Stocks to Watch.
If not pharmaceuticals, then what? The move would be to watch the tech sector, split into two separate categories - Delivery and Online Services. Let's begin with the most obvious move, staring straight at us. Delivery companies, such as Amazon/Uber in the US and Grabfood/Deliveroo in S.E.A. will see huge spikes in their revenues the next few months as people are home-bound. Furthermore, they are up-and-coming behemoths in their industry, taking over the traditional brick-and-mortar. However, their stock prices are crashing simply due to the fact that the overall indices are. This presents a perfect buying opportunity when everyone else is running scared.
Next to watch; Online/Cloud based companies who have no bottom-line changes with the two aforementioned market movers. Examples are social media outlets like Instagram and Facebook (which are, by the way, both owned by FB), or gaming companies like EA and Activision-Blizzard. As home-quarantines take effect, city lockdowns or simply more and more people staying at home due to the virus, people will be bound to hop online, not only to keep up with the latest news and happenings, but due to pure boredom and restlessness. When this happens, their Monthly Average Users and new signups would most likely soar, leaving their bottom line better off than before. However, once again, their stock prices are plummeting thanks to the overall market crash - Thus presenting a perfect buying opportunity into great businesses at a relatively cheap price.
Goodluck & Stay Healthy
Ricky
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