On 19th March 2020, the Australia’s benchmark ASX200 share index market closed down 3.4% lower at 4,782.9, the lowest level since Feb 2016. Rate cut by the Reserve Bank of Australia (RBA) have caused the banking sectors’ stocks to fall continuously as their net interest margins on loans will fall. Meanwhile the airline leader, Qantas continues to be one of the worst performing stock due to the coronavirus-induced travel bans.
The novel coronavirus outbreak that started in China has infected more than 200,000 people globally and killed over 8,000. The vast majority of infections and deaths remain in mainland China, followed by Italy, Iran and Spain all have more than 4,500 deaths.
Fears about a global coronavirus epidemic are already taking their toll on world financial markets and are likely to impose significant economic costs on the Australian economy as well. Australia’s economy was already struggling because of the bushfires that occurred in the fourth quarter. GDP growth of 1.7% in the year to September compared with 2.8 in the previous 12 months, due to the weak consumer spending and the slowdown in China.
Export Hit – Some of the Australia’s major exports include iron ore, thermal coal, and liquefied natural gas and energy products, and China is one of the biggest consumers. Data from the Australian Bureau of Statistics showed the country exported 13.89 billion Australian dollars ($9.1 billion) worth of merchandise to China in December 2019, accounting for about 34% of total exports for the month.
Behavioural Bias Impacting Investor’s Portfolio
Coronavirus fear has led to the massive selling in the stock market and even the good quality blue chip companies have plummeted from their historic highs. The portfolio of excellent, fundamentally strong stocks has come down 30-50%.
Behavioural Bias Impacting Your Portfolio – During market downturn, emotions start impacting the investor’s time horizon. When the markets are rising, the time horizon extends from 3 to 5 years but when the markets are in panic state, investors’ shrink their time horizon from months to weeks. Notable behavioural biases working in the current scenario – Over-Reaction (People tend to overreact to both good and bad news) and Herding (Investors tend to imitate others).
There is always a possibility that the market prices are influenced by factors like errors in judgment by investors, sentiments, emotions, and irrationality.
Amid Such Uncertainty What Exactly Should Investors Do?
But all said, the markets will eventually recover. The Only question is when. The excellent/fundamentally strong stocks will bounce back quickly once this negative scenario gets over. We believe that the fall in the price of good quality stocks is temporary.
In our view, this is a good time to revisit your portfolio and add some quality stocks with strong businesses operating with sound balance sheet, top/quality management and growing revenue. Investors now have the opportunity to buy those stocks which were earlier very expensive and now available at cheap valuation.
How Investors Can Build their Portfolio?
We would suggest that instead of buying stocks of good quality stocks in large quantity, spread your purchase so that you can gain from this virus induced volatility. Key qualitative factors to look while building your portfolio – High growth-oriented companies, strong balance sheet, dividend income, quality of management and strong cash flow.
Panic could prove to be one of the best times to invest and build positions in high-quality companies impacted by short-term fear. We believe if you do not invest in stocks now, you will never again. Investors should look to invest in blue chip stocks with high liquidity. Sectors like resources, technology, pharma/healthcare sectors are some of the space where investors can find attractive opportunities. With the correction, the stocks in this space are attractively valued.
Resource Space – Crude oil and commodity prices have come down. Currently, this is the cheapest sector. Stock prices of quality stocks like BHP, Rio Tinto, NewCrest Mining, Woodside Petroleum, Santos, all have shown correction of 30-40%. Investors can benefit from this crisis by investing in companies with operating with strong balance sheet and cash flows.
Technology Space – We believe that stocks in technology space have always available at premium valuation. Due to the coronavirus outbreak, the technology stocks have significantly come down in valuation. Many companies have told their employees to work from home amid this crisis. We believe that such development will increase the demand for online business services ranging from cloud computing to software that support home working. Stocks like Citadel – provider of IT and software services to government, health and security sectors could benefit. Companies working towards automation like Appen and Vection Technologies are also likely to gain.
Pharma/Healthcare Space – Healthcare stocks have benefitted from the fear of coronavirus, and the pharmaceutical companies have started the discovery and development of solutions for the prevention and control of COVID-19. We believe that bio-tech companies like CSL and medical equipment providers like Fisher & Paykel Healthcare are likely to experience increased demand as a result of coronavirus.
Similarly, investors can find opportunities in other beaten down sectors like travel as well as the defensive sectors like retail, consumer discretionary items etc. Coles, Breville, Woolworths Group are some of the options worth looking after the correction.
Coronavirus isn’t yet contained. But the investors should be ready to grab quality stocks at cheap valuation. Successful investors use all opportunities to re-balance their portfolio and they do not let their emotions to control their decisions.
Happy Investing! Think for long term!!
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